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LIBOR and BBSW

I came across this graph in the Australia Markets Weekly published by the National Australia Bank. It shows the interbank lending rates (LIBOR in the UK and BBSW in Australia) in various countries since 2005. This rate is extremely important to the functioning of financial markets as it determines the rate at which banks lend to each other and is often used as the foundation for government and corporate loans. At the height of the credit crisis in 2008 you can see that the risk associated with lending to other banks was seen as extremely high – there was an environment of little trust as nobody knew what high risk investments (CDO’s) banks were holding. Recent events in Europe has seen the interbank lending rates rise with the concern over the euro.

The London Interbank Offered Rate – LIBOR – is determined by rates that banks participating in the London money market offer each other for short-term deposits.

The bank bill interest rate is Australia’s equivalent of LIBOR or SIBOR and is used as a reference rate in much the same way. For instance, a variable floating rate may quote 100 basis points over LIBOR, whereas in Australia they may use 100 basis points over the BBSW. Although frequently abbreviated to “bank bill rate”, the actual term is the “bank bill swap interest rate”, hence the abbreviation BBSW.

Investopedia

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