I was asked by my friends at The Wall Street Journal Prime Rate to review their website.

A first look shows that the site concentrates on displaying the current Wall Street Journal Prime Rate, which is explained by the site as the “interest rate charged by banks when they lend money to other banks, or to their prime business customers”.

Further discussion informs me of the history of the prime rate since December 1, 1947, which is table of facts that I did not readily know.

After reading a portion of the site’s discussion concerning the financial term “prime rate”, my interest was piqued to the extent that I did some research on the subject.

From early times, “prime rate” has been the interest charged by banks to their most credit worthy customers. Although the “prime rate” itself is now a rate of return that bears little relationship to the creditworthiness of the banks’ commercial borrowers, the “prime rate” still varies little among banks. Adjustments are usually made by most all North American banks at the same time. The frequency of change normally happens on a quarterly or semi-annually basis.

So, if banks no longer base their “prime rate” on commercial lending data, just how do banks set their lending rate? Since the mid 1950’s, banks have been advertising their lending rate as a function of the “prime rate” which is technically “The Federal Funds Rate”. That data point is decided at Federal Open Market Committee (FOMC) meetings by the Board of Governors of the Federal Reserve.

Jay