The biggest test of the sensational actions by central banks and governments today will be whether banks become confident enough to lend to each other again.

Britain's biggest bank, HSBC, today said it was aggressively back in the market, giving a fillip to the co-ordinated actions. Immediately after this morning's statement from the Treasury about the recapitalisation plan, HSBC said it had gone into the interbank market and “lent £2 billion to other banks on three- and six-month terms”.
A spokesman added: “We expect to be active in the interbank market again today.”

Interbank lending rates have soared as financial institutions store cash in the fear that they will have to make big payouts in the future to cover possible losses.

Libor, the London interbank overnight rate, which was fixed just before the central banks' action, showed that the cost of borrowing sterling overnight steadied after days of rising. However, the cost of borrowing dollars shot up for a third day running, by 1.4 percentage points to 5.38%.

Chris Hossain of ODL Securities pointed out that bank shares, while not as bad as they had been this morning, had not all made up yesterday's falls: “While the package has been welcomed, the response appears to be muted at present. One has to be concerned that we have not seen all of yesterday's losses recovered.”

Peter Hahn of Cass Business School was sceptical about whether other banks would follow HSBC: “Any suggestions that today's actions will rebuild confidence in the banks and in lending between banks is absurd.

“The interbank markets has now largely been superseded and replaced by lending from central banks. What the banks need to do to build confidence is to rebuild capital. One of the most effective tools in rebuilding capital is to borrow from central banks and then invest in gilts.

“Unfortunately, a half-point cut means that banks would be borrowing at 4.5% when the five-year gilts are yielding about 4.5%.”