Nov. 7 (Bloomberg) -- The cost of borrowing dollars for three months in London fell to a four-year low after central banks around the world cut benchmark borrowing costs and kept the financial system flooded with cash to restore lending.

The London interbank offered rate, or Libor, that banks say they charge one another for loans fell 10 basis points to 2.29 percent today, the lowest level since November 2004, the British Bankers' Association said. The overnight rate held at a record low of 0.33 percent and the TED spread, a gauge of bank cash availability, dropped under 200 basis points for the first time since the day before Lehman Brothers Holdings Inc. collapsed.

``Interest-rate cuts by central banks are bringing down the Libor rates,'' said Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV in Amsterdam. ``But that still hasn't solved the problem. Sentiment might have improved, but the money market will not return to normal until the banking crisis ends. I don't think it has ended yet.''

Policy makers in South Korea lowered their key interest rate today, the third reduction in a month, following cuts by the Bank of England and European Central Bank yesterday. Central banks in Australia, China, Japan, India and the U.S. also cut borrowing costs in the past two weeks.

Money rates declined since central banks pumped an unlimited supply of dollars into the banking system and governments offered bailouts and guarantees to financial institutions. In another sign the freeze in lending may be starting to thaw, Wells Fargo & Co., the biggest bank on the U.S. West Coast, raised $11 billion in a stock sale yesterday to help pay for its purchase of Wachovia Corp.

Rate Cuts

While the Libor for three-month dollars has fallen for 20 consecutive days, it's still 129 basis points more than the Federal Reserve's target rate for overnight bank loans, compared with an average of 22 basis points in the five years before the current credit crisis began in August 2007. A basis point is 0.01 percentage point.

Credit standards for loans to companies tightened ``significantly'' in the third quarter as banks hoarded cash amid the economic outlook, the ECB said today in its quarterly bank-lending survey.

``Expectations for the fourth quarter of 2008 point to the net tightening of credit standards being broadly unchanged from the net tightening observed in the third quarter,'' the Frankfurt-based central bank said.

Overnight Deposits

In a further sign that financial institutions are reluctant to loosen credit as they repair balance sheets, banks deposited a record 297.4 billion euros ($381 billion) yesterday in the ECB's overnight deposit facility at 3.25 percent, up from 274.5 billion the previous day.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the British Bankers' Association before noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms ranging from one day to a year.

South Korea's central bank, led by Governor Lee Seong Tae, lowered the seven-day repurchase rate by a quarter of a percentage point to 4 percent in Seoul today, extending cuts since Oct. 9 to 1.25 percentage points, the most aggressive sequence of reductions since the bank started setting a policy rate in 1998.

Yesterday, the ECB cut its main refinancing rate by a half- percentage point to 3.25 percent and the Bank of England lowered its rate 1.5 percentage points to 3 percent, the lowest level since 1955. The reduction was the U.K.'s biggest in 16 years.

`Gradual Improvement'

``Over the course of the past three weeks we have seen significant improvements in Libor,'' Jonathan Rick and Michael Cloherty, strategists at Bank of America Corp. in New York, wrote in a report dated yesterday. Still, swap spreads haven't narrowed as rapidly as lending rates, which shows ``the market expects a longer period of more gradual improvement than previously,'' they said.

Short-term U.S. company borrowing costs fell today, with rates on the highest-ranked 30-day commercial paper dropping 0.44 percentage point, approaching the low of 0.89 percent set on June 25, 2003, the last time the Fed cut its target rate to 1 percent. Commercial paper, which matures in 270 days or less, is used by companies to cover expenses such as salaries and rent.

The difference between Libor and the overnight indexed swap rate, a measure former Fed Chairman Alan Greenspan recommended as a gauge of money markets, dropped 9 basis points at 174 basis points. That compares with 87 basis points on the last trading day before Lehman went bankrupt on Sept. 15, and an average 11 basis points in the five years before the crisis started.

The TED spread, which measures the difference between what the government and banks pay to borrow for three months, dropped 9 basis points to 199 basis points today. It was last below 200 on Sept. 12.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

Last Updated: November 7, 2008 11:27 EST