The Federal Reserve has been targeting raising its feds fund rate.
Investopedia has a description of the feds funds rate:
“The rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis.”
However, interbank lending has been on a trajectory to zero since 2009.
Why is this market on a death spiral? Simple. Banks are loaded with excess reserves. There is no need to be involved in interbank lending especially when the fed is paying interest on excess reserves. Risk free money.
Even though interbank lending is dead, LIBOR (London Interbank Offered Rate) is still alive and well. Bloomberg ran an article talking about how relevant this market still is when pricing financial instruments. LIBOR is calculated from a daily survey of more than 15 large banks that estimate how much it WOULD cost to borrow from each each other without putting up collateral. I decided to capitalize “would”. There is a difference in what people say they will do and what they actually will do. From the Bloomberg article:
The OTC derivative market is the most complex, opaque and leveraged financial market in the history of the world. I do not believe a financial panic or crisis is imminent. However, this is an early sign of excesses in the financial markets.