BBA bows to pressure to overhaul Libor

The key Dollar Libor interest rate has registered its biggest increase since near the start of the credit crunch after the British Bankers' Association bowed to industry pressure and announced reforms to its benchmark measure for inter-bank borrowing.

The London inter-bank offered rate for the dollar has been lagging other money market rates, sparking suspicion that banks have been under-reporting their borrowing costs to avoid being stigmatised. The rate for three-month dollar Libor jumped 10 basis points to 2.79 per cent in its biggest increase since last August. The new rate is the highest since the end of April.

Libor is set using a daily survey of 16 panel banks that report the rates they pay to borrow from each other in different currencies and for varying lengths of time. It is thus a key measure of how prepared banking institutions are to lend to each other.

The BBA said it would scrutinise more rigorously the rates that banks submit. It will also expand the membership of its foreign exchange and money markets committee, which oversees Libor, and increase the number of contributors to some of the rate-setting panels.

It will also seek opinions on whether the rate-setting mechanism, which shows what rates banks are reporting, is stigmatising contributors and whether there should be a second rate-fixing process for US dollar Libor after the US market opens. The change for US Libor would aim to set rates more in line with supply and demand for dollar lending.