London's financial district, the "City," at twilight, from Tower Bridge.

While much focus is currently on central banks and decisions on their key interest rates - the European Central Bank and Bank of England will announce rate decisions on Thursday and the Federal Reserve's Federal Open Market Committee will announce its decision on the Federal funds rate on September 18th.

The ECB rate is currently at 4.00%; Bank of England's rate is 5.75% and the Fed rate is 5.25%.

Whether central banks hold, raise or cut rates, a key interest rate has already risen, reflecting the continuing credit crisis and it has implications for the real economy.

The London interbank offered rate, or Libor, is an important international benchmark for big companies, US mortgages and corporate deals.

Libor is the interest rate charged by banks for short-term loans to each other and is set daily by the British Bankers' Association (BBA) in London. The loans can be in US dollars, euros, UK pounds or other currencies.

The BBA uses Reuters to fix and publish the data daily, usually before 12 noon UK time.

It assembles the interbank borrowing rates from 16 contributor panel banks at 11am, looks at the middle 50 per cent of these rates and uses these to calculate an average, which then becomes that day's Libor rate. This process is followed 150 times to create rates for all 15 maturities (ranging from overnight to 12 months) and all 10 currencies for which a Libor rate is quoted.

The turmoil in the interbank market has pushed the three-month sterling Libor rate to 6.7975% on Tuesday, more than 100 basis points above the Bank of England’s official base rate of 5.75%, and its highest level since the 1998 financial crisis.

The three-month US dollar-denominated Libor rate – which generally tracks the Federal Funds rate, now at 5.25% – rose to nearly 5.7%, up from almost 5.67% on Monday. The rate a month ago was 5.36% and for the first eight months of this year, the rate ranged between 5.34% and 5.36%.

The rise in Euribor - the counterpart of Libor for the Eurozone - prompted AIB Bank last Friday, to raise its prime rate from 4.625% to 5.00%.

One reason for the rise in Libor, is that many European bank have big commitments in the struggling commercial-paper markets. They are reluctant to lend out dollars, and this is boosting short-term borrowing rates. Some are also concerned that their counterparties in these trades, other banks, might be too weak to pay back the loans.

The Wall Street Journal says that a host of credit derivatives are also pegged to the Libor, as are many short-term commercial-paper loans used by banks -- $3 trillion globally. Financial contracts with values of about $150 trillion are indexed to the Libor, according to a paper published in May last year by Donald MacKenzie, a sociology professor at the University of Edinburgh.

In a related development, the Wall Street Journal says in a report today that though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper.

The investment vehicles, known as "conduits" and SIVs (which stands for Structured Investment Vehicles), are designed to operate separately from the banks and off their balance sheets.

Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission.

Yet some investors worry that if vehicles such as Centauri stumble, either failing to sell commercial paper or suffering severe losses in the assets it holds, Citibank could wind up having to help by lending funds to keep the vehicle operating or even taking on some losses.

Citigroup has told investors in its SIVs that they are sound and pose no problems.

"Quite simply, portfolio quality is extremely high and we have no credit concerns about any of the constituent assets," said a recent letter from Paul Stephens and Richard Burrows, directors in Citigroup's London-based group that oversees the bank's SIVs. "Citi's SIVs remain robust and their asset portfolios are performing well."

The Journal says that a Citigroup spokesman declined to comment on the bank's SIV disclosures or potential exposure that it might face from them.

The Journal also says that current market turmoil has rekindled debate over whether the vehicles should be consolidated. Some also suggest banks should have to account for the liquidity backstops they offer these vehicles, since they resemble guarantees and could even force banks to take conduit or SIV assets onto their own books.

In Europe,  "conduits" held in Dublin by German State banks have been in the news in recent weeks because of losses linked to the US subprime crisis.