Another year at least of stressed interbank lending

By Mike Dolan - Analysis

LONDON (Reuters) - Banks are braced for at least another year of wholesale funding pressures that will continue to haunt those fearful for financial stability -- but a repeat of last August's money market seizure looks unlikely.

Interbank lending stress -- or the inability of banks to rely on each other for short-term funding -- has been both a key symptom and a root cause of the seven-month old credit crisis plaguing the world's banks and wider economy.

Open-ended promises by the world's major central banks to provide cash advances to strapped banks wherever needed has provided an alternative life-support machine since December.

But all the signs are that lifeline will be needed for the rest of the year as banks repair balance sheets and reputations.

And weaning them off this support will likely be a painful and nervous process that will continue to elevate bellwether London Interbank Offered Rates for many months to come.

A Reuters poll of euro money market traders this week showed few of them expect a return to more "normal" interbank lending conditions for at least three months.

Bank chiefs seem gloomier. "There will come a time when wholesale funding costs start to ease back, it may be late 2008 or early 2009," Andy Hornby, chief executive of Britain's biggest mortgage lender HBOS, told Reuters on Wednesday.

And many analysts, who increasingly compare this credit seizure with the U.S. Savings & Loan crisis of the early 1990s, reckon that the two years it took U.S. banks to recapitalise and stabilise back in 1992-1994 period is probably a good yardstick.