Finance and financial exchange traded funds (ETFs) can feel the impact of bank-to-bank lending rate cuts. But the impact may not be all that helpful.

The London interbank offered rate (Libor) fell to 2.51% from 4.82% compared to the Federal Reserve’s target interest rate of 1%, reports by Gavin Finch of Bloomberg. Libor is seen as the benchmark rate for financial contracts from derivatives to company loans and mortgages.

Large government bailouts coupled with cash injections by central banks helped drive Libor down without much conviction for lending by financial institutions. Banks are cutting back and unwilling to extend credit.

As of November, the Fed stated that about 85% of U.S. banks tightened lending standards for large- and mid-sized companies.

Central Banks from all over have helped drive down money-market rates by offering oodles of money in concert to reduce interest rates. But there is a catch: the banks may not pass the benefits of lower rates to consumers and businesses. Banks world wide are reassessing the price for risk with the intention of increasing cost for loans.

The sales of corporate bond in Europe and the United States both dropped, which is seen as another sign that lending remains restricted.

Two financial ETFs influenced by credit market crunch:

• Financial Select Sector SPDR (XLF): down 46.8% year-to-date

• iShares S&P Global Financial Index Fund (IXG): down 47.5% year-to-date

Tags: Financial, IXG, Sector ETFs, XLF