Bank Prime Rate

The prime rate is the rate that commercial banks charge their best and most important customers or borrowers, which are usually large corporations. Although banks are free to determine their own bank prime rate, in lots of countries the prime rates are more or less equal.

The prime rate is often used as the benchmark for developments in other loans such as car loans and adjustable mortgage loans. The prime rate is influenced by the interest rate as decided by a country’s central bank. The central bank of the United States is the Federal Reserve Bank, also popularly called “The Fed” or “The Feds”.

In the United States, following the mortgage crisis the Federal Reserve Bank decided to cut its interest rate by a half percentage point to 4.75% on Tuesday the 18th of September 2007. The banks in the United states reacted to that decision by cutting their prime rates from 8.25% to 7.75% just minutes after the Federal Reserve Bank’s announcement.

The United States bank prime rate is adjusted at the same time by most banks, which means that on 18 September 2007 all banks in the United States changed their prime rate to 7.75%. The bank of Canada’s prime rate is 6.25%. For an overview of the current prime rate of Canada, the United States and prime rates of other countries have a look at the World Interest Rates Table.

All central banks try to influence their national consumers’ behaviour by making adjustments to the prime interest rate. The Federal Reserve Bank of the United States as well tries to control consumer behaviour with making adjustments to the interest rate. Adjustments aren’t made too often, usually a few times a year, depending on national as well as international economic developments.

The United States’ most widely recognized prime rate index is the Wall Street Journal Prime Rate, which is being published in the Wall Street Journal. The Wall Street Journal Prime Rate Index identifies the prime rate as follows: "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks”. However, whether this definition is still valid these days is contested, since a lot of corporate loans (at which the prime rate is applied), are indexed to the LIBOR, the London Interbank Offered Rate.

In addition to the prime rate being influenced by the Federal Reserve Bank, the bank prime rate is often as well running more or less 300 points (3%) above the Federal Funds Rate, the rate that banks charge each other when lending interbank-wise. When a lot of corporate loans are being indexed to the LIBOR, this means that the prime rate is being determined by interbank overnight loans rather than by the base rate on corporate loans.