INTERBANK RATE:THE INTERBANK cost of borrowing overnight dollar funds soared yesterday to over 10 per cent, more than five times the Federal Reserve's target rate, indicating dollar lending between banks had virtually ceased.

The dramatic rise amid deepening financial market disruption reflects the scarcity of dollars in European trading hours, funds that European institutions desperately need to cover short-term dollar liabilities and exposures, traders said.

That need has been made even more pressing since the failure of Lehman Brothers at the weekend and the increasingly precarious situation of other major financial firms, such as US insurer American International Group.

Reuters data showed overnight dollar deposit rates indicated as high as 11.50 per cent yesterday and market participants said banks' reluctance to lend meant deals were only being done at much higher rates.

Some said the drying up of dollar funds was as serious as anything seen during the entire global financial crisis, including the August 9th money market seizure last year that many say marked the onset of the 13-month-old credit crunch. "This is much worse than August last year," said one market source.

Another said: "European banks can't get dollars. Banks are hoarding in case of payment issues" related to the collapse of Lehman Brothers.

"We need the ECB and SNB to start providing more dollars," he said.

The European Central Bank was among several central banks which pumped short-term funds into their respective local money markets on Monday to help ensure the functioning of these interbank markets.

The Bank of Japan, Bank of England (BoE), and the ECB again, were among major central banks that injected funds into their markets, with the BoE providing a hefty £20 billion.

But it is dollars that banks are short of.

"I don't want to provide liquidity for other banks which don't have a client customer status," said one rates trader.

"If we look at the electronic platforms there is hardly any liquidity there. What we're doing here, we're providing liquidity on a 10 cent-spread between bid and ask, normally the spread is about 3 or 4 cents."

In another sign of how frozen interbank markets are, some bankers said the foreign exchange swaps market was not functioning.

Given where market-based overnight rates were trading yesterday, traders said it was likely they would be fixed even higher later in the day.