BBA May Increase Number of Banks in Daily Setting of Libor

By Shannon D. Harrington and Liz Capo McCormick

June 19 (Bloomberg) -- The British Bankers’ Association may expand the pool of banks that set the London interbank offered rate in a bid to bolster confidence in the benchmark for more than $360 trillion of financial products around the world.

Banks without a physical presence in London may apply to join the panel of members that contribute to the Libor-setting process, the BBA said yesterday. Banks will have to be “material participants” in the London market, said the BBA, which a year ago said it would look to expand the panel of contributors and possibly add a second daily survey.

The London-based BBA began a review of the 25-year-old system for setting Libor rates last year amid speculation that some banks may have understated their funding costs to avoid being seen as having difficulty raising financing amid a seizure in the credit markets. The rates banks say they pay for three- month dollar-denominated loans fell to 0.61 percent yesterday, from 4.82 percent on Oct. 10.

“Longer-term this change should create more depth and credibility to Libor,” said George Goncalves, chief fixed- income rates strategist at Cantor Fitzgerald LP, one of 17 primary dealers that trade with the Federal Reserve. “More people will trust it. Shorter-term it creates uncertainty in the process and that is what feeds into more volatility, and possibly an uptick in Libor.”

Gaining Attention

Libor, a benchmark rate for everything from mortgages to corporate borrowing costs, gained attention in August 2007 as losses from subprime-contaminated securities made banks wary of lending to each other.

Investors said they were convinced institutions were reporting incorrect Libor figures to keep from appearing that they were in difficulties. The BBA threatened to ban members that deliberately understated rates before beginning a consultation process to discuss improvements.

“The more names you add to the survey the more you dampen the volatility of the results and that’s a good thing,” said Chris Ahrens, Stamford, Connecticut-based head of interest-rate strategy at primary dealer UBS Securities LLC. “But we need to see” which banks join the survey, he said.

The BBA, which isn’t regulated, asks member banks once a day how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages and publishes them before noon in London. Sixteen banks contribute to the dollar setting, three of which are U.S.-based.

BBA Clarification

“This clarification will not affect the way in which current contributors formulate their rate submissions,” Brian Mairs, a spokesman for the BBA in London, said by e-mail. “It may allow banks that participate in the London markets, whose eligibility for inclusion in the fixing was not previously clear, to apply to join the panels.”

The BBA has “no expectation of the numbers of banks who might apply,” Mairs said. The BBA said it will make a further statement today, he said.

“Most of the banks that are in the panel would tell you that right now it’s not necessarily worth the trouble,” said Carl Lantz, an interest-rate strategist in New York at primary dealer Credit Suisse Securities LLC. “It just brings scrutiny on you. If you put in a high fixing people are saying you’re having problems. If you put in a low fixing people are saying that you’re trying to distort the fixing.”

The BBA first said in June 2008 that it may increase the number of banks that set the rates and was considering the addition of a second daily survey to reflect U.S. trading. London-based ICAP Plc, the biggest broker of transactions between lenders, introduced a new measure of U.S. bank rates last year as an alternative to Libor.

“One can always argue that you’ll get a better fix if you have a larger sample of relative players in the market,” said Laurence Meyer, vice-chairman of Macroeconomic Advisers LLC and a former Fed governor. “There was the somewhat discrediting of Libor earlier and some even suggested that we get a New York sample. This sort of pre-empts something like that.”

To contact the reporters on this story: Shannon Harrington in New York at sharrington6@bloomberg.net; Liz Capo McCormick in New York at emccormick7@bloomberg.net.