Reply #41: The Fed pumped in $70 billion of temporary reserves into the U.S. banking system on Monday

[UpInArms]

http://www.reuters.com/article/bondsNews/idUSLG51833720080916?sp=true

LONDON, Sept 16 (Reuters) - The interbank cost of borrowing overnight dollar funds soared on Tuesday to over 10 percent, more than five times the Federal Reserve's target rate, indicating dollar lending between banks had virtually ceased.

The dramatic rise amid deepening financial market turmoil reflects the scarcity of dollars in European trading hours, funds that European institutions desperately need to cover short-term dollar liabilities and exposures, traders said.

That need has been made even more pressing since the failure of Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) at the weekend and the increasingly precarious situation of other major financial firms, such as U.S. insurer American International Group (AIG.N: Quote, Profile, Research, Stock Buzz).

Reuters data showed overnight dollar deposit rates indicated as high as 11.50 percent <USDOND=> on Tuesday and market participants said banks' reluctance to lend meant deals were only being done at much higher rates.

Some said the drying up of dollar funds was as serious as anything seen during the entire global financial crisis, including the Aug. 9 money market seizure last year that many say marked the onset of the 13-month-old credit crunch. "This is much worse than August last year," said one market source. Another said: "European banks can't get dollars. Banks are hoarding (cash) in case of payment issues," related to the collapse of Lehman Brothers.

"We need the ECB and SNB (Swiss National Bank) to start providing more dollars," he said.

The European Central Bank was among several central banks which pumped short-term funds into their respective local money markets on Monday to help ensure the functioning of these interbank markets.

The Fed pumped in $70 billion of temporary reserves into the U.S. banking system on Monday.

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