MONEY MARKETS-Bank funding costs rise on Europe tension

* Some European banks paying more for short-term cash

* No 2008-style panic yet, but anxiety elevated

* European bank CDS costs edge up (Adds Fed data on foreign bank deposits)

By Karen Brettell and Steven C. Johnson

NEW YORK, Aug 19 (Reuters) - Some European banks were forced to pay more for short-term loans on Friday as anxiety about their exposure to debt problems in Europe stayed high.

The benchmark for unsecured dollar loans between banks, three-month Libor LIBOR, rose above 30 basis points for the first time since early April. It fixed at 0.30300 percent.

Banks rely on money markets for cash to finance trades and loans. Fear that some may be at risk to indebted euro zone countries has made lenders cautious.

After Lehman Brothers collapsed in 2008, anxiety hit a fever pitch and investors stopped funding banks completely, disrupting the entire world economy.

"It's still nowhere near as stressful as it was in the fall of 2008, the darkest days of the financial crisis, but by historical measures and the measures of the past couple of years it's certainly wider," said Eric Stein, portfolio manager at Eaton Vance in Boston.

Investors have been underwhelmed by Europe's attempts to get its debt crisis under control and worry the euro zone's bailout fund is too small to aid larger economies such as Spain and Italy, both of which have come under market pressure and seen their borrowing costs rise.

Market participants are expecting bank borrowing costs to rise, with future contracts implying another nine-basis-point increase by the middle of September.

Some European banks, including Barclays (BARC.L), Credit Agricole (CAGR.PA), Credit Suisse (CSGN.VX), Royal Bank of Scotland (RBS.L), Societe Generale (SOGN.PA) and UBS (UBSN.VX), were forced to pay slightly above the Libor rate on Friday to borrow three-month money.

That shows concerns over the region's banking system are still running high. While investors have not cut off funding to European banks, most are reluctant to lend beyond a week, market participants said.

"There are signs of stress, but there are no signs of alarm," said Amrut Nashikkar, an analyst at Barclays. "Libor is inching up slowly, rather than jumping up."

He said money market mutual funds, another source of short-term funds for banks, were playing it safe by not rolling over maturing short-term loans.

"The borrowing costs of banks are slowly going up because existing money fund investments in banks have been rolling off," he said. "Rather than withdrawing money they are just choosing not to roll it over."

Banks increased the amount of deposits parked at the Fed to $813 billion in the week ended Aug. 10, data on Friday showed. These deposits are largely funded by cash borrowed in the commercial paper market.

But foreign deposit cash may have dwindled this week as funding stresses intensified.

One of the Federal Reserve's most influential policymakers said the U.S. central bank was keeping an eye on European banks' U.S. operations, though he said it was part of "normal, standard operating procedure."

"The reality is we monitor European banks and U.S. banks every day, so there's nothing to be particularly alarmed about that," said New York Federal Reserve President William Dudley.

"It's prudent for us to make sure that we understand what's going on." [ID:nN9E7H700P]

CDS STRESS

Concern could also be seen in the credit default swap market, where investors pay to insure bonds against default. The cost to insure the bonds of Societe Generale for five years rose 15 basis points to 300 basis points, according to data from Markit.

That amounts to 300,000 euros ($432,150) per year to insure 10 million euros of debt.

Five-year CDS costs also rose for other large French, Spanish and Italian banks, including Unicredit SPA (CRDI.MI), and BNP Paribas (BNPP.PA).

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Graphic showing CDS spreads for Euro zone, UK and U.S. banks: r.reuters.com/pyn23s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Abnormalities in short-term financing markets have been on the rise for weeks, with worries about the U.S. economy and global growth adding to concerns about Europe's debt crisis.

Earlier this week, an unidentified euro zone bank turned to the European Central Bank for a one-week loan of $500 million, suggesting it could not afford dollars at market rates.

It was the first time a euro zone bank had tapped the ECB for funding since February.

On Thursday the Swiss National Bank tapped the Federal Reserve for $200 million, drawing on a special swap line the U.S. central bank set up for foreign central banks.

"The SNB drew down the swap line and presumably on-lent the dollar funds to a Swiss regulated bank that was presumably struggling to access dollar funding," said Credit Suisse consultant Sean Keane in a note to clients.

But he added that "it would appear unlikely the loan will have been to any of the major banking names as the volumes would likely have been much larger if a major institution was to have sought central bank assistance."

Euribor rates, the average interest rates at which a group of more than 50 European banks borrow from one another, fell Friday. Market participants said this reflected expectations the European Central Bank will keep benchmark interest rates on hold at 1.5 percent well into next year.

BNP Paribas strategist Alessandro Tentori recommended long positions in the December Euribor future as a hedge in case market turmoil and world growth prospects worsen to the point where the ECB and other central banks have to start cutting rates as they did in 2008 after Lehman Brothers failed. (Additional reporting by Edith Honan in New York and Marius Zaharia in London; Editing by Andrew Hay and Leslie Adler)