The London interbank offered rate (Libor) that banks say they charge each other for three-month loans in dollars stayed near a four-week high after the US delayed announcing its financial rescue plan.
The rate dropped one basis point to 1.23 per cent, its first decline in seven days, the British Bankers' Association said. The Libor rose by 15 basis points since January 14 on concern banks will need further government assistance. The Libor-OIS spread, a gauge of banks' reluctance to lend, narrowed one basis point.
US Treasury Secretary Timothy Geithner delayed the announcement of the Obama administration's plan as officials debated proposals aimed at addressing the toxic debt clogging banks' balance sheets. Options include the creation of a so-called bad bank to buy the illiquid assets and a new round of injections of taxpayer funds into banks, people briefed on the matter said.
Banks became wary of lending to each other amid the financial crisis that has led to more than $1 trillion (Dh3.67trn) of writedowns linked to real estate lending. Three-month dollar Libor rose as much as 200 basis points in the month after Lehman Brothers filed for the world's biggest bankruptcy on September 15.
The rate declined by 374 basis points to 1.08 per cent by January 14 as the Federal Reserve reduced its key interest rate to as low as zero percent to encourage lending.
Most of the second half of the US' $700 billion Troubled Asset Relief Programme (Tarp), has yet to be allocated. The first half was dedicated to injecting capital into more than 300 financial firms and bailing out automakers. The programme's original mandate to buy illiquid assets from banks has foundered on the question of how to value the securities.
The Libor-OIS spread, which former Federal Reserve Chairman Alan Greenspan said should serve as an indicator for when markets have returned to normal, narrowed one basis point to 97 basis points. It averaged nine basis points in the 12 months before the credit crisis began in August 2007.
The TED spread, the difference between what the government and companies pay for three-month loans, declined two basis points to 95 basis points compared to a record high of 464 basis points on October 10.
The euro interbank offered rate, or Euribor, that banks say they charge each other for three-month loans, fell two basis points to 2.01 per cent, the lowest level in almost five years, according to the European Banking Federation.
In Asia, dollar funding costs eased slightly as money markets prepared for the new US administration's fresh stimulus plans.
In India, analysts hinted at the possibility the central bank may cut rates again. The Reserve Bank of India (RBI) kept its repo rates steady at a policy meeting in late January while alluding to its frustration that commercial bank lending rates had not come down as fast as policy rates, but a few state-run and other banks have been cutting rates in past weeks.
While interbank rates have come down in India, they remain much higher than levels seen in the first half of 2008. The spread between three-month interbank rupee rates and the same tenor overnight-indexed swap was 380 bps, below 465 seen in early January but far above a spread of 150 in July.
In South Korea, the spread between one-year and two-year interest rate swaps was 35 bps, while the three-month treasury bill yield has also fallen 35 bps in the past month to 1.93 per cent.