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Flow of interbank lending at risk

THERE are renewed fears that the flow of interbank lending could be at risk after banks put €90.5bn on deposit with the European Central Bank last night. Banks placed the money on deposit instead of lending it to each other.

Yesterday the chief economist at the European Central Bank (ECB) said that the situation was being taken seriously as a signal of market tension.

However, in an interview with Germany's 'Handelsblatt' newspaper, Juergen Stark said the situation was not as dramatic as it was in 2008.

Fluid interbank lending is crucial to keeping money flowing through the economy. Banks are normally happy to lend to each other on a daily basis.

In 2008, after the collapse of Lehman Brothers bank, other banks hoarded cash, fearing they could lose even money loaned out for short periods. The lack of lending threatened to collapse some banks by leaving them with too little money to function.

The interbank freeze is generally seen as the decisive factor in turning the financial crisis into a global recession.

Yesterday, three-month Euribor rates, traditionally the main measure of unsecured interbank lending, fell to 1.533pc from 1.535pc.

The rate fell on the growing expectation that the ECB will cut interest rates later this year, and on banks' declining appetite to lend.

The recent increase in eurozone financial market tensions has pushed banks to stock up on funds available from the ECB, even though the cash is not being loaned on to customers.

Excess liquidity in the euro money market rose to €142bn according to Reuters calculations -- way above normal levels. (Additional reporting Reuters)

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