Inter-bank lending in the Northern Hemisphere had become "jammed up" in recent days in the wake of the collapses of several banks and the failed vote in the US Congress for a US$700 billion bailout package, Reserve Bank Governor Alan Bollard has said.

But inter-bank lending was continuing in the Australasian markets and spreads or interest rates for inter-bank lending over lending by central banks had not risen as much in Australia and New Zealand as they had in Europe and North America.

"We are keeping a very close eye on the banking system because we really haven't seen this degree of international financial turbulence ever, so it is having an effect," Bollard told Radio New Zealand National in an interview this morning.

"But what's happening at the minute is some parts of the financial markets are in a bit of limbo. We're seeing some pretty extraordinary spreads out there but very little being transacted at those rates. We're all on hold waiting for the US Congress to pass this package and for the institutions get enough confidence to get back into the markets again," Bollard said.

"We're all on watch at the moment. The New Zealand banking system is sound. It's got Australasian banks that have very good quality credit risks and we're not expecting particular problems out of that," he said.

"New Zealand and Australian banks fund from deposits which have been very strong and increasing. They fund from domestic markets, they fund from their parents, and they do fund offshore, and some of that offshore funding is in this CP market, which is the market that has taken a real big hit and has gone into limbo at the moment," he said.

"They (New Zealand's banks) would rely on that over forthcoming months to start operating again and we would expect it to start operating again. At the minute I don't think they're overly concerned about that and we're not either, but we're certainly monitoring that because we haven't seen this sort of move before."

"What he might worry about is what might happens in the United States which is very big spreads between the sort of rates that the central banks would like to see in place and the actual interbank lending. In New Zealand and Australia that spread hasn't particularly jumped out anything like what it's done in the United States and Europe. We've had a bit of stickiness like that but not particularly much.

"But it's early days and we really have to watch to see how Wall St and Washington start working things through and watch what Europe does and see if it has much affect here.

Asked if a continuation of frozen markets could prove a problem, he said: "Yes. If the market stayed jammed up, but we don't expect that to happen and nor do the people in the markets at the minute because the Australian and New Zealand spreads are much more subdued."