Saturday, September 27, 2008

Why has interbank lending shut down?

3 reasons. Are there more?

(i) Banks are terrified of not getting their money back due to bankruptcy and not being able to access funds if they need them.

(ii) Why borrow and lend to your fellow banks if you can get plenty of cheap funding from your central bank.

(iii) Lending is dead because interest rates are too low to reflect 11% inflation and the existing default risk.


Myrtle Blackwood said...

(iv) Don't lend to troubled banks so that the institutions fail and the US-Government-favoured banks then buy their assets at a knock-down price AND now. thanks to Bernanke and Paulson largesse, the banks can purchase these cheap assets with taxpayer money.

``Rescuers are waiting until after a failure before stepping in. This allows them to buy only certain assets and means they don't have to acquire all liabilities.''

Lehman, WaMu Show Buyers Wait for Banks to Fail: Chart of Day
By Mark Gilbert. 26th September 2008

jsalvati said...

The other story I have heard is that banks don't want to lend because they are terrified that they themselves will need the money shortly if investors lose confidence or it turns out some of their assets were worse than they thought.