Why a dramatic imbalance between the funding patterns of U.S. and European banks could be driving continued tensions in the money markets, according to new research from central bank officials.

European banks have secretly increased their dependence on dollar funding by about $500bn in the last four years to some $800bn by mid-way through last year before the credit crisis turmoil struck. Much of the funding was apparently borrowed from US banks.

However, American banks, by contrast, have been raising most of their US dollar funding from money market funds, which they have then lent on to other banks, such as those in Europe, new research by officials at the Bank for International Settlements has shown.

This dramatic difference in the funding patterns may help to explain why Libor – the benchmark rate for interbank money markets – has continued to stay so high in recent weeks, in spite of the emergency measures introduced by the Federal Reserve, central bank officials believe.

In particular, in recent months it appears many US banks have slashed their dollar lending to other banks because they have been hoarding funds. This has created tensions in money markets as European banks, unlike their US counterparts, do not have direct access to the liquidity programmes offered by the US Federal Reserve.

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