The Guessing Game - Who's the Time Bomb?

The subprime contagion seems to have stretched its hands of terror into the money markets - the source of funding where banks borrow or lend money between themselves and other institutions. The central banks in Europe and the U.S. have to step in to quell the problems in the markets and provide liquidity.

So what's the problem now?

The banks need to borrow funds in the money markets to fund their assets e.g. loans made to retail consumers e.g. housing loans and corporates for their investments. The deposits that you and me place with the banks are insufficient to meet their needs, so the banks have to borrow in the money markets to meet any shortfall, often to meet regulatory requirements. While they can lend from the central banks, the banks often avoid that because borrowing from the central banks could be perceived as having credit problems. They hence borrow in the interbank market even though the interest rate is slightly higher.

However, recent credit events have caused banks to distrust one another because everyone thinks that there is a joker in the pack. That one big bank may be holding massive unannounced losses and am trying to borrow money in the market to close its gap. To avoid a second Barings - where the unsuspecting lending banks essentially lose their loans where the veritable institution collapsed.

Over in London, this has caused the interbank lending rate to shoot up, trading at more than 1% over the Bank of England lending rate, essentially telling one another -"I am not interested in lending to you. Borrow from the Daddy".

The million-dollar question - who's the time bomb?

Or is there ever one?