Banks park money in European central banks

The collapse of trust in money markets has led to more than €100bn being parked overnight at the European Central Bank - by far the highest amount ever, underscoring the extent of stress in the global financial system.

Banks are increasingly dealing with central banks rather than each other as the crisis of confidence persists, but central banks around the world are finding it difficult to judge demand for funds as every bank's needs are different.

The volatility in wholesale money markets was underscored on Wednesday with big reductions in overnight unsecured interest rates, but rises in the costs of three-month money.

On Wednesday the Libor rate for overnight US dollar borrowing was fixed at 3.79 per cent, a plunge from 6.87 per cent on Tuesday with a similarly large fall seen in sterling overnight interest rates. But if any banks are able to borrowing in dollars, euros and sterling for three months, the interest rates on these deals got more expensive - up to 4.15 per cent in the US, 5.28 per cent in the eurozone and 6.31 per cent in the UK.

The €102.8bn left on Tuesday night in the ECB's deposit facility, which pays a below-market interest rate of 3.25 per cent, highlighted banks' reluctance to deal with each other. The sum was more than double the amount deposited on Monday night.

At the same time, other banks borrowed almost €16bn from the central bank's marginal lending facility, which incurs a penalty interest rate of 5.25 per cent.

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In a sign of the difficulties of working out how much money to pump into the banking systems, the UK central bank offered two US dollar auctions on Wednesday morning, one overnight and one for a week, but found demand thin for both. Less than half the money offered was taken up in the $30bn weekly auction.