Governments step up credit fight, banks line up at Fed

By Jamie McGeever and Richard Leong

LONDON (Reuters) - Most interbank lending rates fell on Thursday in the wake of more steps by central banks to provide funds, improve bank balance sheets, and open up credit lines to cash-strapped institutions.

U.S. banks borrowed from the Federal Reserve at a record daily pace in the latest week, as the wounded credit market has been slow to heal from the growing regimen of financial medicines prescribed by monetary authorities.

London interbank offered rates (Libor) for U.S. dollars, euros and sterling fell across all maturities, with the exception of overnight euro Libor, the British Bankers' Association's latest daily fixing showed.

Sizable declines were noted in dollar and sterling Libor at the short end from overnight to two weeks. And even though overnight euro Libor edged up, it was fixed right on the European Central Bank's target rate of 3.75 percent.

But the Libor fixings weren't uniformly encouraging. The Libor premium over anticipated policy rates, a key measure of financial market dislocation, rose as deepening fears of recession strengthened expectations central banks will have to cut interest rates further.

"Libor is coming down at an unnervingly slow pace," said Dana Saporta, economist at Dresdner Kleinwort Securities LLC in New York. "The international effort to unlock the credit logjam has not had much of an effect so far."

FED'S LONG MONEY LINE

Cash-strapped U.S. banks and dealers lined up at the Fed's discount window to receive their daily dose of cheap funds.

Discount window borrowing in the week ended Oct 15 averaged a record $437.5 billion per day, surpassing the $420.2 billion rate in the prior week.

The Fed is preparing more credit programs to relieve the current credit distress. It plans to launch its Commercial Paper Funding Facility under which it will buy top-rated 3-month commercial paper on Oct 27.

In the meantime, the U.S. commercial paper market continued to contract despite signs of limited recovery.

For the week ended Wednesday, the size of the U.S. commercial paper market, a critical source of funds for many companies in financing their daily operations, fell $40.3 billion to $1.511 trillion, the Fed said.

That brings the cumulative decline of this market to $304 billion over a five-week span, including the previous week's $56.4 billion drop.

"Buyers and sellers are going to sit on the sidelines until the Fed starts its CP program," said Rudy Narvas, senior strategist at 4Cast Ltd. in New York.

CREDIT FIGHT ABROAD