Bankers Group Reviews Libor Amid Manipulation Concern
[... There could be some big, ugly numbers here]
The British Bankers' Association will speed up the review of the process by which money-market rates are set daily amid concern that some contributors are providing misleading quotes.
The global credit squeeze has raised concern lenders have been manipulating the so-called fixing process to prevent their borrowing costs from escalating, the Bank for International Settlements said in March. Participants have complained about whether banks are submitting accurate information, said Angela Knight, chief executive of the London-based BBA.
The association, which held its annual board meeting today, said it will ban any member deliberately misquoting lending rates. The rate serves as the basis for many interest-rate derivatives, including swaps that switch between fixed and floating-rate payments, which totaled $382.3 trillion in the second half of last year, according to the International Swaps and Derivatives Association.
``At the heart of the problem is that this credit crisis has crystallized why we are referencing so many securities to an uncollateralized reference rate and not a market price,'' said Francesco Garzarelli, director of macro and markets research at Goldman Sachs Group Inc. in London. ``That is why the panel is being solicited to provide better quotes. Libor is a rate that has lost some of its reference value in the current crisis.''
The BBA asks 16 member banks every morning to say how much it would cost them to borrow from each other for 15 different periods in currencies including dollars, euros and pounds. It then calculates averages, known as the London interbank offered rates, or Libor, which are used as benchmarks for companies, lenders and investment banks around the world, including the $1.21 trillion a day market for interest-rate swaps.
`Ensure the Integrity'
The BBA represents lenders such as HSBC Holdings Plc, Europe's largest bank by market value, Royal Bank of Scotland Group Plc and Barclays Plc. Spokespeople Patrick McGuinness of HSBC, Alistair Smith of Barclays and Carolyn McAdam of RBS declined to comment.
Liquidity concerns, the cost of wholesale market borrowing and Libor rates were discussed at the board meeting. The BBA holds a review of its daily money market operations every year, concluding in June. The BBA didn't say when the review would be completed.
``This is about the need to ensure the integrity of Libor is absolutely right,'' Knight said. ``We are in this very difficult credit situation and this is the right and appropriate thing to do. We have had people contact us. We recognize the points that have been made. We need to open up and have a good look.''
The complaints to the association were reported earlier today by the Wall Street Journal.
`Severely Weakened'
``Libor will survive, although its credibility is severely weakened,'' Paul Calello, Credit Suisse Group's head of investment banking, said in a speech at the International Swaps and Derivatives Association annual conference in Vienna today. ``Continuing to base an enormous amount of derivative contracts on an index with credibility problems is a serious issue we must address.''
Money-market rates began surging last year as the fallout from the U.S. housing slump left banks wary of lending to all but the safest borrowers. The three-month dollar rate was at 2.73 percent today, the highest since April 3, according to BBA data. That's 48 basis points more than the Federal Reserve's target rate for overnight lending between banks, compared with an average of 11 basis points in the first half of last year.
Three-month Libor understates true lending rates between banks by between 20 and 30 basis points, according to an April 10 research note by Citigroup Global Markets Inc.
`Prevailing Fear'
``The most obvious explanation for Libor being set so low is the prevailing fear of being perceived as a weak hand in this fragile market environment,'' wrote Scott Peng, head of U.S. rates strategy at Citigroup in New York.
Eurodollar futures contracts, which are based on traders' expectations for three-month dollar Libor, rose today amid concern that rates may increase at tomorrow's fixings as banks exercise more care when giving quotes, said Ian Lyngen, an interest-rate strategist at RBS Greenwich Capital in Greenwich, Connecticut. The implied yield on the contract expiring in June climbed 12 basis points to 2.68 percent.
``The risk is that there are calls coming down from the highest level of the 16 different banks associated with the Libor process saying this better not be us and if it is, it better not be us tomorrow,'' said Lyngen. ``We might find out tomorrow'' if estimates of Libor's inaccuracy were correct.
Money markets would benefit from increased transparency and ``trimming,'' or the discarding of extreme rates quoted by participating banks, the Basel, Switzerland-based BIS said in a study released in March with its quarterly report. The system still worked as it was meant to do when rates started rising last year, it said.
bloomberg.com
Jim |
