Banks in cash crunch as third quarter ends

NEW YORK: US and European banks struggled for cash on wholesale lending markets yesterday as they closed books on the final day of a tumultuous third quarter amid signs credit was still tight.A continued lack of liquidity on interbank markets on both sides of the Atlantic and ongoing difficulties for some smaller banks trying to raise short-term funds offset optimism earlier in the week about an opening up of international bond markets for specific borrowers.

Benchmark euro zone lending rates rose to six-year highs and three-month interbank offered rates were fixed at 4.792 per cent - the highest since May 2001 and almost 80 basis points above the European Central Bank's key interest rate.

Federal funds, the key overnight market for borrowing between banks, traded at 5.25pc yesterday in New York, a full 50 basis points above the fed funds target rate the US central bank sets.

Normally, Fed funds would not trade more than a handful of basis points on either side of the target rate, which is now at 4.75pc after the Fed cut it for the first time in four years.

Climbing fed funds rates pointed to a double whammy of quarter-end supply pressures and fear about lending conditions in money markets, analysts said.

"You do have some quarter-end pressures in effect that provide some of the reasoning for the upward pressure on both Fed funds and London Interbank Offered Rate (Libor)," said Kenneth Kim, economist with Stone & McCarthy Research Associates in Princeton, New Jersey, US.

"The other explanation is there are concerns in the market that the liquidity crisis has not dissipated," Kim added. "We have pressure returning (to short-term lending markets) and I would say there is cause for concern," he said.

"In short-term money markets, there certainly does appear to be an issue...there is a lot of jitteriness and fear going into not just month end but also quarter end," said T J Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York.

"There is a fair amount of trepidation that we have not found the skeletons yet," showing the full extent of banks exposures to riskier assets across the world, Marta added.