Libor returns to pre credit-crisis levels

by Gill Montia

Story link: Libor returns to pre credit-crisis levels

On Wednesday of this week, Libor (the London InterBank Offered Rate, the rate at which banks lend to one another) fell to its lowest point since the credit crisis began, in August of last year.

Libor was at 6.9% in September, when the Bank of England’s base rate stood at 5.75%.

Earlier this week it dropped to 5.89%, which is just 39 basis points above the current base rate of 5.5%.

The fall was partly in response to a pledge by central banks in the UK, US, Switzerland, Canada, and the Eurozone to inject $600 billion of emergency funding into the money markets.

Since last summer, banks have been reluctant to lend to one another because of concerns about losses related to the US sub-prime mortgage crisis.

This shortage of credit resulted in the run on Northern Rock, which depended on the money markets to fund its mortgage lending, rather than on deposits.

While the reduction in Libor should ease the liquidity problems that have been dogging the markets, global economies are still struggling with the price of crude oil, which peaked at $100 a barrel this week.

At the same time, financial institutions are seeing a decrease in the amount of loans raised and consequently a reduction in their profits.