After months of increasing skepticism, the British Bankers Association
yesterday (Tuesday) announced changes to its London Interbank Offer Rate
(LIBOR).
“These changes will further strengthen BBA Libor and the confidence of its
many users,” BBA Chief Executive Angela Knight said.
The BBA proposed a number of measures meant to restore confidence to the
daily LIBOR rate, including: increasing the number of contributing banks, adding
more non-contributing banks to the Foreign Exchange and Money Market Committee,
and a possible second rate published during North American business hours to
better reflect the U.S. market.
“There has been a lot of nervousness in the market that Libor is not
calculated accurately,” Giuseppe Maraffino, a bond strategist in Milan at
UniCredit Markets & Investment Banking (PINK: UNCIF),
a unit of Italy’s largest bank, said in an interview with Bloomberg
Television. “For sure the decision by the BBA to create more
transparency will be met positively by the market.”
Currently, 16 banks provide the daily borrowing rate in dollars, euros and
yen for a variety of maturities. The BBA discards the four highest and four
lowest rates before calculating the daily average, which is published at 11:30
a.m. London time.
As the global credit crunch began to unfold, some experts began to suspect
that contributing banks were underreporting their actual cost of borrowing in
order to not look like bad credit risks. One such expert was Money
Morning Contributing Editor Martin Hutchinson.
“In these volatile markets, any whisper of trouble over a bank makes other
banks’ dealers not want to place money with them,” Hutchinson said in a
Money Morning investment analysis that acknowledged
the problems back in April. “Their feeling is that there’s no point in getting
fired for doing business with another bank that goes bust, especially as you’d
probably be losing your job at the bottom of a bear market, when times are
tough. So, it’s not surprising that the LIBOR system is wobbling a bit.”
The three-month dollar LIBOR rate jumped 10 basis points to 2.79% yesterday,
its biggest increase since August and the highest level since April 30.
