The cost of three-month dollar loans between banks fell modestly to a six-year low Thursday after the U.S. Federal Reserve said the recession had eased slightly since its last meeting in mid-March, though it stressed that economic activity would likely remain weak. It also pledged anew to keep its key bank lending rate at a record low "for an extended period" - it stands in a range of zero percent to 0.25 percent. Article Controls EMAIL REPRINT NEWSLETTER COMMENTS SHARE YAHOO! BUZZ The British Bankers' Association said the rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - fell 0.01 of a percentage point to 1.02 percent, its lowest level since June 2003. The equivalent rate for three-month loans in euros - known as the European Interbank Offered Rate, or Euribor - fell 0.01 percentage point to 1.36 percent while the three-month sterling rate also dropped 0.01 percentage point to 1.45 percent. Interbank lending rates affect the wider economy by determining the costs of loans to households and businesses. They had spiked higher since the start of the financial crisis, and have only been falling gradually as governments and central banks around the world announced a raft of measures to stimulate the global economy and financial sector. All three rates are well down on their peaks after big interest rate cuts from the U.S. Federal Reserve, the European Central Bank and the Bank of England. As well as falling sharply, the spread between the Libor rates and the market's expectations for the benchmark rates in three months time have narrowed sharply, indicating that banks are more willing to take on risks. All three spreads are now below one percentage point. Though the U.S. Federal Reserve cannot reduce its rate from the current 0-0.25 percent range and the Bank of England has indicated that its rate-cutting campaign has ended with the benchmark rate at 0.5 percent, the European Central Bank is expected to reduce borrowing costs further in the months ahead from the current 1.25 percent. Before the financial crisis became most acute in the wake of Lehman Brothers ( LEHMQ - news - people )' bankruptcy, the spreads were around 0.75 percentage points. And before the credit crunch started, they were well below 0.5 percentage points. Attention is turning to the verdict of the U.S. government's stress tests of the country's 19 major financial institutions. The reports are set for release Monday, though Bank of America Corp. ( BAC - news - people ) and Citigroup Inc. ( C - news - people ) have been told by regulators the two will likely need to raise more capital, according to a Wall Street Journal report. The report suggested that Bank of America's capital shortfall could run into billions of dollars, which, in the current environment would likely be extremely difficult to raise through the private sector. The reports are set for release Monday, though Bank of America Corp. and Citigroup Inc. have been told by regulators the two will likely need to raise more capital, according to a Wall Street Journal report. The report suggested that Bank of America's capital shortfall could run into billions of dollars, which, in the current environment would likely be extremely difficult to raise through the private sector.

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