Dollar Demand Is Strong, but Lending Lags Behind
The dollar remains in heavy demand from banks around the world, a sign trust among banks remains fragile.</br></br>While a number of indicators show credit markets are thawing, economists, central bankers and investors are paying keen attention to the rate at which foreign banks are pulling dollar deposits out of their U.S. branches. That pace has set records for several months, according to the latest data from the Treasury Department. The moves, analysts say, suggest banks still are scrambling for ways to finance investments in dollar-denominated securities such as U.S. mortgage-backed bonds.</br></br>Before the credit crisis hit in August 2007, foreign banks could freely borrow dollars from U.S. banks and one another. Bank affiliates also could sell short-term IOUs. Now banks are demanding bigger lending premiums for certain loans.</br></br>On the bright side, the banks' increased reliance on U.S. deposits is making them less dependent on central-bank lending programs, which were put in place as an emergency backstop. Still, it also demonstrates how brittle the lending markets remain. Until banks develop more trust among one another, even short-term borrowing rates will remain relatively expensive, making economic recovery more costly for businesses and individuals.</br></br>This has had an unexpected effect on the London Interbank Offered Rate, or Libor, which is supposed to reflect the interest rates banks charge each other for loans. A large gap has appeared between the one-month and three-month Libor, in what analysts say is a worrying sign that banks remain reluctant to make longer-term loans to one another. As of Friday, three-month dollar Libor was 1.01%, 0.59 percentage point more than the rate on one-month loans. Historically the gap hovered close to zero.