Robert Peston has blogged today about the issue in the Interbank market. Peston is doing a good job in these difficult times to trying to keep up with events and explain them to 'the rest of us.'
In this case though, the malaise is much worse than he implies. Effectively it looks like banks won't lend to each other at all. All the current interbank lending is from governments to banks. In fact there should be a huge super-liquidity issue and the LIBOR rate should be low.
But it is not, and why is this?
- Possibly banks do not want to lend as the risk of default or nationalisation has become to high.
- Possibly because now they have more of a handle on their CDS exposure they have voluntarily raised their effective capital ratios.
- Possibly because their internal estimates of bad loans etc are in fact much worse than they are letting on and so the banks need to be prepared for further, bigger writedowns than have been announced thus far. Lehmans went bust with $646 billion of (gross) debt, not the $85 billion (net) it was telling everyone the week before.
None of these are good situations to be in.