Look to Libor

If you’re wondering why your Lloyds shares fell nearly 10% today (or was that just me?) then you need to keep an eye on Libor, which hit a 10-month high in dollar terms today:

The three-month U.S. dollar London interbank offered rate, or Libor, was fixed at 0.53625%, up from 0.50969% on Monday, according to the British Bankers’ Association. Tuesday’s rate marked the highest level since early July and continues an uptrend that began in the spring.

Libor is a benchmark of how much banks charge each other for borrowing funds from one another in the London wholesale market. In normal times it closely tracks base rates, but at times of crisis it balloons.

We’re still a long way from the 5% interbank rate we saw in 2008 as fear gripped the market, but the steady rise on the back of European sovereign debt worries is certainly unnerving some people.

A key difference between 2008 and now is that bank balance sheets are much ‘cleaner’ today, compared to the height of the credit crisis, when every banker wondered what timebomb was about to explode next.

This may not stop Libor continuing to rise – or Spanish banks failing, of course – but it does mean its progress should be more logical and orderly, and thus that we should avoid the complete shutdown of the market.

Well, touch wood!

(Source: MarketWatch)

Tagged as: banks, libor