RBS, Iceland and EU response eyed as money mkts freeze

By Jamie McGeever

LONDON (Reuters) - Interbank money market activity was virtually non-existent again on Tuesday as investors' focus fixed firmly on renewed weakness in banking stocks and European policymakers' efforts to tackle the deepening crisis.

Shares in Royal Bank of Scotland plunged as much as 40 percent and Iceland's financial system sank deeper into the mire on Tuesday, as European finance ministers gathered in Luxembourg to discuss how to respond to the crisis.

Money market participants said collateralised lending beyond one week was negligible, while there was almost no unsecured lending at all for periods beyond overnight.

So-called "term" funding costs stayed high, with three-month euro deposit rates indicated as high as 5.38 percent, the highest since the euro's inception almost a decade ago.

Another round of central bank money market operations early in Europe on Tuesday, a day after the U.S. Federal Reaserve expanded its liquidity provisions, helped keep interbank overnight lending rates reasonably close to official targets.

But by and large, lending had virtually ground to a halt and calls for more effective policy response across the globe -- particularly from Europe -- grew louder.

"Having major banks down 40 percent isn't going to help money markets without government intervention," said Meyrick Chapman, rates strategist at UBS in London.

"It's been clear for at least a week that we need government intervention. Otherwise we are in even more trouble."