All this worrying about how high 3-month Sterling Libor rates are is missing the point.  In the last 12 months or so, 3-month Libor standing at a significant premium to the Bank Rate undeniably put the sword into Northern Rock and Bradford & Bingley (and the same sword prodded Alliance & Leicester into the arms of Banco Santander).  However, this is now (painful) history and elevated Libor levels are now part of the solution and no longer the problem for the remaining UK banks.

Once they have received their recapitalisation money (£7 bln for BARC, £11.5 bln for HBOS, £5.5 bln for LLOY and £20 bln for RBS), this cash will no longer need to be borrowed from the wholesale markets.  In general as the banks manage their loan-to-deposit ratios back down towards 100%, they will raise fewer funds via the 3-month interbank market.  Note that HSBC has an 88% loan-to-deposit ratio.  However the 3-month Libor rate is still important as the banks’ borrowers generally pay a spread over Libor (and for those borrowers that pay a spread over the Base Rate, please note that not all banks are lowering their Base Rates in lock-step with the rapidly declining Bank of England’s Bank Rate). 

In short, do not expect the banks to be falling over each other in their rush to offer down the 3-month Libor rate towards the Bank Rate.  Mr Darling can rant & rave all he likes, but the reason Libor stands at a 150 bp premium to the current 3% Bank Rate is that there is a general net borrowing requirement in the UK wholesale money markets and HSBC cannot fill the demand all by itself.  International investors are not exactly keen to hold a falling currency and this also reduces the supply of Sterling in the wholesale money markets.

Do not blame the banks either, as charging a fat spread between what they pay depositors and what they charge borrowers is a key part of good old-fashioned banking.  Remember the days when banks used to make money and pay cash dividends…