BBA fights to shore up confidence in Libor system

The decision of an anonymous group of 13 financial industry figures will get more attention than normal today when the British Bankers' Association announces changes designed to shore up confidence in its industry-standard inter-bank lending rate.

The London inter-bank offered rate (Libor), which is the benchmark for more than $350 trillion (£180trn) of derivatives and corporate bonds, has been under the spotlight since it spiked up at the start of the credit crunch last summer. The cost of lending between banks rocketed as they hoarded cash while liquidity drained from the system.

The BBA has brought forward a regular review of banks on its Libor panel. The Foreign Exchange and Money Markets Committee, whose 13 members are kept secret to protect them from pressure from Libor users, will also consider a review prepared by John Ewan, the BBA's director of wholesale markets.

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. The system has been the industry standard for measuring banks' cost of borrowing since it was established 24 years ago.

The BBA makes money from Libor by licensing data providers to use the rates. The system faces competition from Icap, the inter-dealer broker, which is working on a rival method. Icap's system would survey at least 24 anonymous banks for the cost of lending to a representative bank, rather than asking for their own borrowing costs.

Industry sources said options for improving Libor included expanding the panel of banks, making them anonymous and reflecting the price of lending asked by money market funds, which are key players in providing funding to banks. The Bank for International Settlements said in March that some banks that provide information for the rate may have understated borrowing costs. Banks might have done this to avoid being stigmatised for appearing riskier than their rivals.

Tim Bond, a strategist at Barclays Capital, said yesterday that Barclays had been punished for quoting the correct rates while others massaged their figures down. "Other banks tried to push their head above the parapet on occasions as well but with every attempt you were met with a lot of rumour and innuendo," he told Bloomberg TV.

In the first week of September, Barclays quoted three-month dollar rates to the BBA above those of its peers, prompting questions about the bank's financial position and contributing to a fall in Barclays' shares.

The BBA said last month that it would throw out any member found deliberately understating rates. The Libor rate for borrowing in dollars jumped on the following two days.