Bankers warned that radical plans to reform London Interbank Offered Rates – the daily reference rate for loans and derivatives – could lead to confusion and force up funding costs.
The British Bankers’ Association is considering a second US dollar Libor fix when New York opens and an additional European dollar index to capture dollar trading in Europe. It will also increase the number of banks that set Libor.
One banker said: “Two daily rates is a recipe for confusion. There are billions of dollars based on the Libor rate; a small difference in the New York rate could represent a huge amount of money.
“You are setting two standards and you can never have two standards.”
Other bankers say increasing the number of banks, which offer quotes to fix Libor, could force up rates and it does not address the problem that levels are drawn from voluntary quotes, rather than trades.
The BBA stressed that it would not add a second Libor fix if market participants felt that it would cause confusion and added that it would consider carefully which other banks it would use to set rates.
The BBA’s move, the biggest change to Libor in a decade, is a response to complaints that it has become an inaccurate benchmark.
The difference between overnight rates set by the US, UK and European central banks and three-month Libor in dollars, euro and sterling remains high.
The main source of controversy is centred on the dollar Libor index, which is set in London before the US markets open.
Only three of the 16 banks that contribute quotes are based in the US, even though dollar Libor is used for a large volume of dollar loans and derivatives contracts.
The implied level of dollar Libor deduced from looking at the foreign exchange swaps market has also diverged sharply from dollar Libor.
This is because European banks have sought to convert their holdings of euros into the US currency on a large scale as they have increased their dependence on dollar funding – prompting foreign exchange swaps to swing out in some unusual ways.
Three month dollar Libor on Tuesday had its biggest daily rise since August after Ben Bernanke, US Federal Reserve chairman, issued a warning on inflation on Monday. It rose to 2.786 per cent from 2.69 per cent.
By David Oakley and Gillian Tett |
