The cost of three-month dollar loans between banks fell below 1 percent for the first time ever on Tuesday amid ongoing stock market gains and despite concerns about the capital position of some of the big U.S. banks.
The British Bankers' Association said the rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — fell 0.02 of a percentage point to 0.99 percent.
Meanwhile, the three-month sterling rate fell 0.01 percentage point to 1.44 percent.
The equivalent rate for three-month loans in euros — known as the European Interbank Offered Rate, or Euribor — fell 0.01 percentage point to a new record low of 1.34 percent ahead of this Thursday's expected quarter point rate cut from the European Central Bank, which would take the benchmark rate down to 1 percent.
Interbank lending rates affect the wider economy by determining the costs of loans to households and businesses. They had spiked higher since the start of the financial crisis, and have only been falling gradually as governments and central banks around the world announced a raft of measures to stimulate the global economy and financial sector.
All three rates are well down on their peaks after big interest rate cuts from the U.S. Federal Reserve, the European Central Bank and the Bank of England. As well as falling sharply, the spread between the Libor rates and the market's expectations for the benchmark rates in three months time have narrowed sharply, indicating that banks are more willing to take on risks. All three spreads are now below one percentage point.
Though the U.S. Federal Reserve cannot reduce its rate from the current 0-0.25 percent range and the Bank of England has indicated that its rate-cutting campaign has ended with the benchmark rate at 0.5 percent, the European Central Bank has at least one more rate to come, according to most economists.
Before the financial crisis became most acute in the wake of Lehman Brothers' bankruptcy, the spreads were around 0.75 percentage points. And before the credit crunch started, they were well below 0.5 percentage points.
Attention is turning to the verdict of the U.S. government's stress tests of the country's 19 major financial institutions. The companies are expected to find out later Tuesday about whether the government thinks they need to shore up their capital positions. A report in the Wall Street Journal Tuesday said about 10 of the 19 banks undergoing the tests will be instructed to boost their capital base one way or another.
