LIBOR BBA website

Horses for courses?

5 Sep 2007

Diverging rates highlight differing strategies among UK, US and Eurozone central banks

Today’s announcement by the Bank of England that it has increased the target levels for reserves has had an immediate effect. Overnight Sterling BBA LIBOR dropped from 6.11000 per cent yesterday to 5.90625 per cent today.

However, the three–month Sterling BBA LIBOR continues to rise, setting at 6.80000 per cent. This is the highest level it has reached in the recent period of stress in the credit markets, and this key rate has not been as far above the Bank of England’s base rate for a sustained period of time since the collapse of Long Term Capital Management in 1998.

This contrasts with the behaviour of the BBA LIBOR fixings in other currencies. In the United States, where the Fed has repeatedly stepped in to ease markets, three-month dollar BBA LIBOR is currently only around 30 basis points above the Fed rate.

However, central bank intervention is not a guaranteed panacea for all credit market ills. The European Central Bank has stepped in to the market repeatedly to provide liquidity, and yet the three-month Euro BBA LIBOR is still 70 basis points above the base rate, lower than in the UK but not as stable as in the US.

BBA Chief Executive Angela Knight CBE said:

"We welcome the Bank of England’s intervention, which brings better liquidity to the market."

BBA LIBOR is the benchmark index that shows the rates at which banks will lend money to each other.

It is calculated for all the major world currencies. Usually, it sets just above the base rate in each currency’s home country, unless there is an increased perception of risk in a market, and then it will climb further above base rate.

Recently, market worries centred on which banks are exposed to risky US sub-prime mortgages and related investments have driven up BBA LIBOR rates in all currencies, most noticeably in Sterling.

Key facts about BBA LIBOR

1. What is BBA LIBOR?

The British Bankers' Association London Interbank Offered Rate closely reflects the real rates of interest being used by the world’s 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.

When referring to these rates, please note 'LIBOR' is a generic term, which refers to an individual bank’s rate. 'BBA LIBOR' is the benchmark index of London interbank lending. 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.

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 considerably.

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 from Prof. Donald Mackenzie of the Universtiy of Edinburgh estimates that financial derivatives totalling USD 150 trillion are indexed to BBA LIBOR.

For further information, please contact:
Press office (020 7216 8989)
Out of hours contact: (020 7216 8888)

Notes to Editors

Attached with this press release is an Excel spreadsheet showing the changes in BBA LIBOR rates for three currencies: sterling, the US dollar and the euro. These illustrate the effects on the market of the three central banks' differing intervention strategies.

This briefing is part of an occasional series offered to journalists while the current market volatility continues.

The BBA permits the use of the logo for BBA LIBOR in appropriate circumstances, including media reports. You can download a copy of the logo from the BBA website fromt the link below.

Daily BBA LIBOR rates are published by Reuters and are available also through Thomson Financial, Telekurs, Bloomberg, Infotec, IDC, Quick, Class Editori, Proquote and other information providers.

Historic BBA LIBOR rates are available from the internal link below.

Related Links

Historic BBA LIBOR rates (Internal Link)
Download BBA logo from the link below (External Link)

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