Bank-to-bank lending rates for dollar and sterling funds fell to fresh record lows on Wednesday while a stress gauge of the money market remained at its lowest since before the collapse of Lehman Brothers. After the demise of the investment bank nearly a year ago, which caused the interbank money market to seize up, central banks have pumped in massive amounts of cash to resuscitate the banking sector.
Comments at the annual US Federal Reserve retreat over the weekend cemented expectations that such liquidity was unlikely to be drained out any time soon, even though the worst of the global recession in 70 years is nearing a close.
The benchmark three-month dollar London interbank offered rate (Libor) was fixed at a record low 0.37188 percent on Wednesday, well off the high of 4.81875 seen last October. This week it also fell below the equivalent yen Libor rate for the first time in 16 years, Reuters charts showed. Three-month yen Libor was at 0.38813 percent.
"Given the fact that rates in the US are close to zero, it's no surprise to see this," said Patrick Jacq, strategist at BNP Paribas in Paris. The US Federal funds overnight rate was last seen at 0.15 percent. The premium that dollar Libor trades over a risk-free benchmark, the Overnight Index Swap rate - a gauge of stress in the banking sector - has fallen from a peak around 365 basis points in October to 19 basis points currently, a level seen in August 2007 just as the credit crisis erupted.
Meanwhile, the three-month Euribor rate, traditionally the main gauge of interbank euro lending, fell to an all-time low of 0.834 percent, while the Libor equivalent, which hit a record low on Tuesday, was fixed just above that trough at 0.81125 percent on Wednesday. Liquidity is plentiful in the eurozone, especially after the ECB loaned banks nearly half a trillion euros of one-year cash at 1 percent in late June. The next one-year tender is due in late September.
ECB Executive Board member Jose Manuel Gonzalez-Paramo called on banks to further strengthen their capital base and liquidity ahead of possible future risks to the system, while also urging them to lend to the real economy. "The international financial system is still in a correction phase. There's still a lot of uncertainty over the health of the financial and banking institutions and their capacity to resist fresh economic turbulence," he said in an interview with Spanish news agency Europa Press.