Credit woes hit bank lending rate

On Tuesday the rate, - known as the London Interbank Offered Rate or Libor - reached 6.7975% for a loan over a three-month period.

It suggests that banks are reluctant to lend money to each other.

It also means Libor is above the Bank of England's emergency lending rate to banks, which is 6.75%.

The last time Libor was this high was in the aftermath of the collapse of US hedge fund Long Term Capital Management, when banks worldwide feared a financial crisis.

"I don't suppose Mervyn King, the Bank of England's Governor, looks for divine intervention terribly often. He may require it this time"
Robert Peston, BBC Business Editor

Under such circumstances, banks do not want to lend out their spare liquidity because there is uncertainty - both about whether the bank will need the cash itself in coming months, and about the financial health of the borrowing bank.

At the moment, banks are worried about how much other banks may be exposed to the US sub-prime mortgage market.

Sub-prime mortgages are offered to people with poor credit histories, but default rates on these loans have been rising in the US as a result of rising mortgage rates.

It has gradually emerged that many European banks have bought portfolios of debt that included large amounts of the US sub-prime debt.

The Libor lending rates are calculated every day by the British Bankers Association.