The London Interbank Offered Rate (LIBOR) is being scrutinized by a parliamentary committee today among continued accusations of manipulation.
The benchmark rate is calculated daily by polling 16 banks on interbank borrowing costs on unsecured funds. The rate is published by the British Bankers Association (BBA). Several whistleblowers have accused the contributor banks of manipulating the rate during the height of the credit crunch by reporting lower costs, thereby understating credit risks and liquidity problems in money markets. Bloomberg:
The [BBA] is under pressure to show the rates are reliable following complaints by investors that financial institutions weren’t telling the truth after the collapse of subprime mortgages nine months ago contaminated credit markets and drove up borrowing costs.
“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 the way along. The BBA has been trying to investigate them and that’s why banks have started to report the right numbers.”
The LIBOR is a crucial tool in the international financial system on which everything from credit derivatives to mortgages depend. Credit and money markets rely heavily on transparency and confidence, The BBA currently has the LIBOR under review and would do well to come up with an effective new methodology to improve transparency.