Money-Market Rate Climbs as Bank Funding Constraints Worsen

Money-Market Rate Climbs as Bank Funding Constraints Worsen 

By Gavin Finch

Sept. 24 (Bloomberg) -- The cost of borrowing in dollars increased after banks paid a record premium for cash at yesterday's Federal Reserve auction, underscoring the shortage of funds available on money markets.

The one-month London interbank offered rate, or Libor, for dollars rose 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. Financial institutions paid 3.75 percent at the 28-day Fed term auction facility, or TAF. That's 57 basis points more than yesterday's one-month rate, the widest spread since the TAF program began in December.

``We've seen quite a bit of upward pressure in the past couple of weeks and the fact that the TAF came in at over 50 basis points above yesterday's one-month Libor will no doubt add to that,'' said Barry Moran, a Dublin-based money-market trader at Bank of Ireland, the country's second-biggest bank. ``It's a bit of a lottery as to where Libor will set.''

Demand for central bank loans backed by collateral surged this week as financial institutions hoard cash and balk at lending to each other on concern more banks will fail. Libor loans aren't secured and typically command rates above those of secured loans of similar maturities.

Demand for euros at today's European Central Bank auction of three-month loans was the strongest on record. The ECB allotted 50 billion euros ($73.3 billion) at a marginal rate of 4.98 percent. That's the highest since 2000. Banks bid for 155 billion euros.