Because if you consider US Treasuries to be risk free, then anything charged above and beyond that to lend to banks is considered the risk premium to do so. The larger the spread, the more hesitant banks are to loan to each other. Its not directly a fear gauge, more a proxy.

Think of it this way, if we lived in a monetarily frictionless world where all capital could goto the highest return for the least risk, then the TED spread would approximate how risky banks think it is to loan to each other vs the US govt, for 3 months.

If the TED spread is widening, the question becomes is it because inter bank lending rates are rising, or treasury rates are falling, or both? Right now its both. To me that strongly hints at massive deflationary fear. Return of capital trumps return on capital.
Josh