To a treasurer working in a large industrial company, the big banks look like Hummers: overweight, oversized and overengineered vehicles that no longer can afford the fuel that keeps them on the road.

They won't lend to anyone who needs money, so they sit with their engines idling until their tanks run dry, whereupon local kids start ripping off the hubcaps, the wheels and the stereo.

Each day there is a government-sponsored rescue, another nationalisation with the shiny bits asset-stripped by predatory rivals. Still no one lends, and yesterday overnight dollar Libor, the benchmark interest rate at which banks deposit dollar funds with each other, jumped to 6.87 per cent.

At such extortionate rates - overnight Libor is almost five percentage points over Federal Funds, the rate charged by the US central bank, and three-month Libor stands at a 2 per cent premium - the banks have shut their doors to commercial lending.

Many banks cannot even get funds at the Libor benchmark and must pay significantly more. However, if the heart of global capitalism is seized up, no such problem affects the corporate sector, where big industrial companies, outside the distressed building sector, are able to fund day-to-day business cheaply by selling commercial paper. These are IOUs, unsecured promises-to-pay for up to nine months, and the biggest corporates, such as big oil and mining companies, can achieve rates of 1.5 per cent below Libor.

To make matters worse, banks are seeking to renege on their promise to lend at agreed interest rates. According to the Association of Corporate Treasurers (ACT), some banks are invoking a “market disruption” clause found in loan agreements. It is a last-resort get-out that permits a banking syndicate to substitute the agreed rate of interest with a rate of interest that reflects its actual cost of funds. The ACT advises its members to insist that such clauses be used only as a last resort, where several banks in a syndicate can secure funds only at rates significantly above Libor.

We may be at the edge of “last resort” and it begs the question whether Libor means anything at all. It also begs another question: if they cannot lend, what use are banks?

In a blog published on the ACT website, John Grout, the association's policy and technical director, suggests where we may be heading if the financial sector continues to unravel. Companies will have to look more to bond markets and less to banks for funding. The unwinding of the banks will extend to the corporate sector, where borrowing will fall, he predicts. Equity will become more important in company funding plans when market volatility is high. That means a higher cost of capital for companies. In plain English, it means that it will become more expensive to run a business, with knock-on consequences for the economy, the high street and you and me.

The big irony of this crisis of global capitalism is that it occurs at a time when companies are reasonably well-funded. Borrowing levels outside the distressed sectors are not excessive and there is little evidence yet of large-scale corporate distress. The chaos in the financial sector has yet to filter through to the high street in the form of collapsing demand and unemployment.

However, we know that this will not last long. Volumes in the commercial paper markets are diminishing as money market funds draw in their horns. They fear that their customers, spooked by the chaos, will begin to redeem their money. If that happens on a large scale, companies will lose a vital funding source and be forced to pay much more for working capital.

During turmoil, everyone looks for stability, but in the financial sector in this gathering storm there is no institution shining a beacon to show the way. Regulators are discredited, politicians are bickering and central banks are ineffective.

There is, however, a supply of liquidity available in the corporate sector, the proceeds of years of strong corporate profits and the build-up of reserves. This money could be tapped if there was a market that functioned effectively to match those flush with cash with firms requiring short-term funds.

This is the proper function of banks. It is what they were created to do - match borrowers and lenders - but these institutions have erected on top of that simple business a tower of investment activity that has nothing to do with being a simple clearing house for funds. So overburdened are these banks from their activities as principal investors, as opposed to simple money agencies, that they have destroyed their fundamental purpose, to be effective conduits of funds.

That is evident from the rollercoaster movement of dollar Libor - the London interest rate quote that is used daily as a benchmark for a million loan transactions around the world has become almost meaningless. It is defined by the British Bankers' Association as the average rate at which banks indicate they “could borrow” at 11am each day. But what if they could not borrow?

Ingenuity is required in times of crisis and, if the banking sector has lost its bottle, others must step in. Few corporates would wish to risk their balance sheets in setting up banks, but perhaps the time has come for an independent clearing house for commercial lending, owned by the borrowers - an institution that had no function but to match lenders and borrowers. It sounds primitive but these are primitive times.

carl.mortished@thetimes.co.uk

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