Comment on today’s BBA LIBOR movements
17 Mar 2008
Commenting on today's movements in interbank lending rates, Angela Knight, Chief Executive of the British Bankers' Association, said:
The continued rise in BBA LIBOR rates reflects increasing liquidity pressures in funding markets internationally. These were referred to in the coordinated statement by the major central banks last Tuesday."
"This is the quarter–end reporting period for many banks internationally: it was always anticipated that rates would tighten further at this time."
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Notes to Editors
BBA LIBOR provides daily measures of the rate at which large banks will lend to each other in the London market across 10 currencies and 15 lending periods ranging from overnight to one year. Overnight BBA LIBOR rates act as a barometer of risk in the financial markets. If the rates are significantly above the interest rates as set by the central bank (or government) it indicates that lenders are more worried about defaults on loans.
This briefing is the latest in an occasional series offered as a service to journalists while the current market volatility continues.
The full name of this service is BBA LIBOR. The term LIBOR has been used erroneously to describe this industry standard, but as individual banks may calculate their own Libor rates, the term BBA LIBOR should be used to distinguish them.
Daily BBA LIBOR rates are published by Reuters and are available also through Thomson Financial, Telekurs, Blomberg, Infotec, IDC, Quick, Class Editori and Proquote, as well as other information providers.
Historic BBA LIBOR rates are available from the BBA website - see the link below.
Key facts about BBA LIBOR
As economists scour the markets for information on the credit crunch, attention has turned to BBA LIBOR as one of the key indicators of what the market is thinking. The BBA has therefore put together this short briefing note for journalists.
1. What is BBA LIBOR?
The British Bankers' Association London Interbank Offered Rate closely reflects the real rates of interest being used by the worlds big financial institutions. Central banks (such as the Bank of England, the US Federal Reserve and the European Central Bank) may fix official base rates monthly, but BBA LIBOR reflects the actual rate at which banks borrow money from each other. BBA LIBOR figures are issued daily on more than 300,000 screens around the world. Rates are quoted for a range of borrowing periods, ranging from overnight loans to 12 months, and a range of world currencies.
2. Why is it in the news?
Because BBA LIBOR rates are calculated daily from the rates at which banks agree to lend each other money, it is a more accurate barometer of how global markets are reacting to market conditions. Recently the overnight borrowing rate has been moving dramatically.
3. How is it calculated?
The BBA uses Reuters to fix and publish the data daily, usually before 12 noon UK time. It assembles the interbank borrowing rates from 16 contributor panel banks at 11am, looks at the middle 50 per cent of these rates and uses these to calculate an average, which then becomes that day’s BBA LIBOR rate.
This process is followed 150 times to create rates for all 15 maturities (ranging from overnight to 12 months) and all 10 currencies for which a BBA LIBOR rate is quoted.
4. What should I be looking for?
Dramatic changes in the overnight BBA LIBOR rate mean that there is short term volatility in the markets. The overnight rate is the rate which is most often quoted in the financial press. The banks' longer–term expectations for the markets are more clearly evident in the 12–month figures.
5. How did it become so important?
BBA LIBOR was first developed in the 1980s as demand grew for an accurate measure of the real rate at which banks would lend money to each other. This became increasingly important as London’s status grew as an international financial centre.
More than 20 per cent of all international bank lending and more than 30 per cent of all foreign exchange transactions now take place in London.
BBA LIBOR is now used to calculate the interest rates for a range of financial instruments and derivatives based on the BBA LIBOR rates are now traded on exchanges such as LIFFE, the Chicago Mercantile Exchange (CME) and SIMEX. Independent research shows that financial products worth a total of around $150 trillion are indexed to BBA LIBOR.