May 13 (Bloomberg) — The benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages is set for its biggest shakeup in a decade on concern that banks misquoted their true borrowing costs.
“We have not run away or hidden from the need for reform or the need for review” of “serious issues” in the U.K. financial-services industry, British Bankers’ Association Chief Executive Officer Angela Knight said at a hearing of a parliamentary committee in London today. The BBA is set to announce the results of its most far-reaching review of the way it sets the London interbank offered rate in a decade on May 30.
The association, an unregulated London-based trade group, is under pressure to show that Libor is reliable following complaints by investors that financial institutions weren’t telling the truth about their funding costs after rising mortgage defaults contaminated credit markets and drove up borrowing costs.
While the association set the one-month dollar Libor rate at 2.72 percent on April 7, the Federal Reserve said banks paid 2.82 percent for secured loans later that day. Secured loans typically yield less than unsecured debt.
“The Libor numbers that banks reported to the BBA were a lie,” said Tim Bond, head of global asset allocation at Barclays Capital in London. “They had been all along. The BBA has been trying to investigate them and that’s why banks have started to report the right numbers.”
Libor rates jumped after the association said April 16 that any member banks found to be misquoting rates will be banned. The cost of borrowing in dollars for three months rose 18 basis points to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze last August. The one-month rate climbed 14 basis points, the most since November.
The cost of borrowing in dollars for three months should be as much as 30 basis points, or 0.30 percentage point, higher than the current rate, Citigroup Inc. said in a report last month.
Banks are understating borrowing costs on concern they will be perceived as “weakened” by the credit turmoil that forced financial companies to record $323 billion of losses and credit- markets writedowns, said Peter Hahn, a fellow at the London- based Cass Business School.
“Since the credit crunch, it’s something that appears to have been manipulated,” said Hahn, a former managing director at Citigroup. “We are in an extraordinarily delicate confidence time where a small event can shatter things quite easily.”
Via Bloomberg. The BBA’s report is scheduled for release today, and there could be ripples.