BBA LIBOR: markets settle after recent volatility

The rate, a daily measure of the rate at which large banks will lend to each other in the London market, has been reaching historic highs above the Bank of England base rate during the past few days, reflecting concerns among banks about the fallout from the US sub-prime markets. Today’s fall – from 6.50 per cent to 6.11875 per cent – suggests banks’ worst fears about the credit markets are receding, at least for now.

BBA LIBOR stands for British Bankers’ Association London Interbank Offered Rate. It is set at 12 noon each day, and shows the level of risk that financiers perceive in the markets. 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.

BBA LIBOR overnight sterling rates usually set just above the base rate - as decided each month by the Bank of England’s Monetary Policy Committee (currently 5.75 per cent). In recent days it has moved more dramatically:

Wednesday 8th August 5.85 per cent
Thursday 9th August 6.165 per cent
Friday 10th August 6.475 per cent
Monday 13th August 6.50 per cent
Tuesday 14th August 6.11875 per cent

The rates had not been as volatile, or as far above the base rate, since the Enron scandal in December 2001.

Today’s change does not mean a return to normality by any means – the BBA LIBOR overnight sterling rate is sensitive to changes in banks’ risk assessments, which in volatile markets may change from hour to hour – but it does mean banks are lending with more confidence than they have been in recent days.