There is an article in today’s Financial Times, whose title, “Battle-scarred bankers lapse into a hoarding habit,” immediately triggered my interest.  The article argues that one of the recent “paradoxes” of the international markets, that recovering stock prices for the leading international banks seem to indicate that the worst of the credit crisis may be over, while very high LIBOR rates seem to indicate the opposite, may be resolved by considering that high LIBOR rates are not a response to credit concerns but rather to old-fashioned hoarding:

Until now, bank analysts have assumed that the high cost of interbank borrowing stemmed from a sense of mutual distrust. This would suggest that, on two occasions in the past eight months, banks have been so nervous of counterparty risk – the danger of one’s trading partners failing to honour their financial commitments – that they did not wish to extend funds to each other.

However, some observers are now thinking that the interbank, or money, market has entered a new, third, phase, one that has less to do with counterparty risk and everything to do with the risk that any institution could face a run on its deposits or other short-term funding.  Thus, the problem is not that banks are paranoid about each other, or so the argument goes; instead, banks are paranoid about their own funding state – not least because they have seen what a lack of liquidity did to Bear Stearns.

Large international banks, in other words, are responding to the current financial crisis by hoarding liquidity, as they have always done, at least since the invention of joint-stock banking, I think in the very early 18th century, and even before.  We have been reminded very dramatically that banks are clearly vulnerable to liquidity runs.  The collapse of my old employer Bear Stearns occurred largely, as far as I can see, because of a very old-fashioned bank run on an institution that was far from bankrupt, or would have been had it not experienced the bank run (i.e.