Dollar 3-month interbank lending rate down again

The cost of three-month dollar loans between banks fell to a new record low on Friday after the publication of the U.S. government's stress test results for the country's top 19 banks.

The tests showed that nine banks have enough capital to withstand a deeper recession, but that ten must raise a total of $75 billion in new capital to withstand possible future losses.

Though the results were more or less as anticipated following a series of leaks earlier in the week, there was a notable sigh of relief that they were out in the open after weeks of speculation.

"The market seems to like the added certainty of knowing the state of the bank balance sheets and doesn't seem particularly concerned about where the money comes from," said UBS analyst Benedikt Germanier.

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 0.94 percent.

Meanwhile, the three-month sterling rate fell 0.01 of a percentage point to 1.42 percent a day after the Bank of England kept its interest rate unchanged at 0.5 percent and raised the amount of money it was pumping into the economy to 125 billion pounds ($188 billion) from 75 billion pounds.

The equivalent rate for three-month loans in euros _ known as the European Interbank Offered Rate, or Euribor _ fell 0.01 of a percentage point to a new record low of 1.31 percent after the European Central Bank cut its benchmark rate to a new low of 1 percent and unveiled some new measures to boost the money supply in the 16-nation single currency zone.

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 may cut further, though many economists think that it will keep borrowing costs on hold for a long while yet.

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.