Jan. 24 (Bloomberg) -- Interest-rate derivatives indicate that banks remain reluctant to lend even after the Federal Reserve has slashed borrowing rates and central banks have provided over $140 billion in emergency funding.

The difference between the rate banks charge for loans in London relative to the overnight index swap rate, known as the Libor OIS spread, has widened from the three-month low touched last week. Widening may signal decreased willingness to lend.

The one-month Libor OIS spread, viewed as an indirect measure of funds availability in the money market, was 19 basis points today, after narrowing to 12 basis points on Jan. 16. The spread peaked last year at 110 basis points on Dec. 4, and averaged 52 basis points for the final five months of 2007. It averaged 6 basis points for the two years prior. A basis point is 0.01 of a percentage point.

Emergency auctions coordinated by the Fed in December provided $70 billion in loans to the U.S. banking system and central banks lent a similar amount abroad. Earlier cuts by the Fed to its target rate for overnight loans failed to break the lending freeze prompted by more than $100 billion in writedowns related to subprime mortgages.

``What the central banks have done since the beginning of the crisis is to provide the market with liquidity, but the source of the problems are still here,'' said Nathalie Fillet, senior interest-rate strategist at BNP Paribas SA in London. Additional losses ``will weigh on banking and credit activity. There is clearly a risk that tensions resume.''

Bank of America

Bank of America Corp., the second-largest U.S. bank, said this week that its fourth-quarter earnings dropped 95 percent after $5.28 billion of mortgage-related writedowns and higher provisions for future loan losses.

Speculation rose last week that the writedowns would expand after bond insurer Ambac Financial Group Inc. lost its AAA grade from Fitch Ratings on concerns that losses tied to subprime mortgages may increase.

The Fed trimmed its target rate to 3.5 percent on Jan. 22, a little over a week before its regularly scheduled policy meeting on Jan. 30, to avert a recession and boost investor confidence.

``While money markets had previously attained a degree of normality with the Libor-OIS fairly close to its pre-crisis levels, it remains to be seen if the Fed's aggressive easing will have the desired effect,'' said Michael Hart, a strategist at Citigroup Inc., in a note yesterday. ``The key to the dislocations in the financial markets still appears to lie with the extent of balance sheet reconstruction by major banks.''

Perceived Credit Risk

Libor OIS spread is also viewed as a measure of what banks perceive as the credit risk in lending to each other and the availability of funds.

Overnight indexed swaps are derivatives in which one person agrees to pay a fixed rate in exchange for receiving the average of a floating central bank rate over the life of the swap. For swaps based in U.S. dollars, the floating rate is the daily effective federal funds rate.

Some additional widening of the Libor-OIS spread won't signal that money market conditions are deteriorating, according to Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

Commercial and industrial loans at U.S. commercial banks declined by $2.2 billion during the week ended Jan. 9, to $1.4463 trillion, compared with the prior week, Federal Reserve figures showed on Jan. 18. Total bank credit, which includes securities plus loans and leases, rose to $9.34 trillion from $9.28 trillion during the period.

``There are still a large number of people who believe that the situation isn't contained, so it is probably natural for spreads to widen,'' Crescenzi said. ``The larger point is that spreads have narrowed in ways that seem to suggest that the Federal Reserve and central banks have taken control of the situation and that banks in general are more confident.''

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

Last Updated: January 24, 2008 13:24 EST