Yesterday the Hong Kong Monetary Authority joined other Asian central banks in undertaking to pump floods of liquidity into the money markets. But while the HKMA's measures will ensure local banks can get access to the cash they need to fund their day-to-day business, they are unlikely to restore bankers' confidence in the system itself.
Over the past few weeks that confidence has taken a severe knock as global markets have gone into convulsions. Immediately before the collapse of US investment bank Lehman Brothers in mid-September, the benchmark Hong Kong one-month interbank offer rate (Hibor) - the interest rate at which banks lend each other short term Hong Kong dollar funds - was quoted at a relatively modest 1.78 per cent.
To put that into perspective, the equivalent rate quoted for US dollar funds in London was 2.5 per cent, implying a considerably higher level of risk for US dollar lending.
The Lehman implosion changed all that. With Hong Kong banks unsure about the level of each others' exposure to tottering US financial institutions, they began to demand a higher risk premium on short term loans and the rate shot up almost three-fold to a punitive 4.83 per cent.
It slipped back a little, only to jump again in response to last week's run on Bank of East Asia, and then again on this week's turmoil. Yesterday, one-month Hibor was quoted at 4.36 per cent.
In historical terms, 4.36 per cent isn't actually that high. The rate hit 5.72 per cent in October last year ahead of the HKMA's intervention to hold down the Hong Kong dollar in the foreign exchange market. And during the Asian crisis 10 years ago, one month Hibor topped 20 per cent on several occasions.
But the problem this time around is not so much the rate itself, but that Hong Kong's banks have lost trust in each other, and so are reluctant to lend at any price. As a result, activity in the interbank market has all but dried up.
