There are two main reasons for this: first, banks’ liquidity needs, especially in US dollar, have risen, because the credit lines extended to the various “conduits” and other financial entities have been largely used. Second, a number of banks are still reluctant to lend to each other, particularly on an uncollateralised basis, in view of perceived counterparty risk.
This attitude contributed to reduced interbank activity – and this in spite of the availability of abundant liquidity in the banking system as a whole. Lessons to be learnt In the light of these developments we, as policy-makers, need to find answers to two questions: What have been the sources and reasons of what we have witnessed?