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Even after the seizure in interbank markets in August 2007, macroeconomists misread the danger.
That "tough-line attitude," they added, had caused the recent increase in interbank funding costs.
Because banks lack the liquidity to cover these positions, they must raise it in interbank markets.
The bonds become less valuable as collateral in interbank lending transactions, forcing banks to use more costly forms of credit.
Many other Northern European banks say that the drought in interbank lending is not a big problem.
Meanwhile, the Chinese authorities have tried to rein in excessive lending, leading to a spike last week in interbank borrowing rates.
Similar(28)
Some of the disruption is an inevitable consequence of faltering demand as the world economy slows; some traffic will be liberated as a result of the thaw in interbank-lending markets.
These in turn have led to financial turbulence, disruptions in market financing and a freeze in the interbank market in Europe.
Sir Jeremy forwarded a note from UBS to Mr Tucker, in which the Swiss bank advocates "speeding up" the gradual decline in the interbank lending rate in the emails sent in late October 2008.
Behind that lurks another risk: Some bankers said that they dared not resume normal lending in the interbank market, in part because investors might think that banks making loans to weaker institutions were taking on too much risk.
The financial market in which interbank lending occurs in the United States is called the federal funds market, and the federal funds rate is the interest rate on the overnight borrowing of reserves in that market.
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