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Key facts about BBA LIBOR

10 Aug 2007

As economists scour the markets for signs of a credit crunch, attention is turning 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 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.

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.

The BBA LIBOR overnight rate for pounds sterling over the past two days has moved upwards daily:

  • Wednesday 8th August 5.85 per cent
  • Thursday 9th August 6.165 per cent
  • Friday 10th August 6.475 per cent

The Bank of England base rate is currently 5.75 per cent.

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.

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

Notes to Editors

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 this BBA website – see the link below.

Related Links

Historic BBA LIBOR rates (Internal Link)

 
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