British Bankers Association caught lying about LIBOR rates

The Daily Telegraph has an extrordinary article today;

First things first .

The London Interbank Offered Rate (LIBOR) is the rate at which members of the British Bankers' Association (BBA) lend money to each other for a variety of currencies. This is a benchmark reference such that , for example the Granite Bonds isued by Northern Wreck were offered in different tranches paying above Dollar LIBOR. Rates are calculated by 16 panel banks across 10 currencies and 15 lending periods ranging from overnight to one year. (Helpful BBA notes here)

This is calulated (see below) and published daily by Reuters and is accessible here - along with historic data in the form of Excel files which can be downloaded.

Yesterday LIBOR soared 8 basis points (0.08% the largest jump since it rose 0.12% on August 9th 2007), this followed commentators who have begun to question the credibility of the published figures suggesting it was being deliberately understated in an attempt to minimise the extent of the banks funding problems..

In brief they are fiddling the published figure because borrowing is more costly than stated.

WSJ report that Thursday was a different story. The highest quote of the morning was submitted by HBOS PLC, which submitted a 2.86% rate for a three-month loan. That was up 0.10 percentage point from Wednesday. HSBC Holdings PLC posted a rate of 2.85%, up 0.12 percentage point from Wednesday.

The DT reports that BBA Libor director John Ewan acknowledged that banks, " were likely to have reconsidered the information they supplied for use in setting Libor."... this was due more to "concerns about difficult market place conditions than questions about credibility," Mr Ewan said.

The DT quote Nomura rate strategist Sean Maloney who says the jump in dollar Libor was "an account to honesty". i.e after a period of fibs they had decided to 'fess up.

Mr Ewan said the reason for the jump in dollar reference rates yesterday, while sterling and euro-denominated Libor were broadly steady, was "tricky to call because it's difficult to disentangle cause and effect". Dollar three-month Libor rose to 2.8175pc, while three-month sterling Libor dipped to 5.90625pc and three-month euro Libor edged up to 4.78pc.

Mr Ewan said the association board had discussed the Libor concerns at a regular meeting yesterday, and added: "I think as a result of that, banks have been looking again at the definition of what they should submit to us." i.e they decided to 'fess up.

But market effects had also played a role and the dollar-denominated Libor was more volatile as a key reference for the derivatives market, "which is almost exclusively a dollar market", Mr Ewan said. Blather, blather, blather ...bollocks.

Anyway (who regularly pummels the Today presenters) to issue a notice :

Commenting on today’s movements in interbank lending rates, Angela Knight, Chief Executive of the British Bankers' Association, said:

"The continued rise in BBA LIBOR rates reflects increasing liquidity pressures in funding markets internationally. These were referred to in the coordinated statement by the major central banks last Tuesday."

"This is the quarter–end reporting period for many banks internationally: it was always anticipated that rates would tighten further at this time."
i.e PR ese for - we decided to 'fess up.

How is LIBOR calculated? (This is the BBA explanation )

The BBA uses Reuters to fix and publish the data daily, usually before 12 noon UK time. It assembles the interbank borrowing rates from 16 contributor panel banks at 11am, looks at the middle 50 per cent of these rates and uses these to calculate an average, which then becomes that day’s BBA LIBOR rate.

This process is followed 150 times to create rates for all 15 maturities (ranging from overnight to 12 months) and all 10 currencies for which a BBA LIBOR rate is quoted.

Plenty of room for wriggle room there then. What is plainly obvious is that the recent figure for LIBOR (especially $LIBOR) have been fiddle / adjusted / amended / reviewed to provie the market with a misleading impression.

How strapped the banks are for cash is the notice by the RBOS of the neeed to shore their Balance sheet with £10Bn from the shareholders. The success or otherwise of this offer will really tell us how flush the banks are with cash. It will be fascinating to see who the underwriters are and what discount they want.

Similiar reports in Reuters WSJ ..."The world's most widely used interest rate took its largest jump since the advent of the credit crisis in a sign that banks could be responding to increasing concerns that the rate doesn't reflect their actual borrowing costs."

....In a note to clients Thursday, UBS AG strategist William O'Donnell suggested that banks were responding to the heightened scrutiny, saying that the BBA's announcement of its inquiry was an attempt "to bring publicly posted rates back into line with the shadow interbank money rate market."

The WSJ also report William Porter, credit strategist at Credit Suisse, says the 3 months LIBOR is 0.4% undersated, Scott Peng, of Citigroup Inc. says it is 0.3 % below the actual level.

Ian Campbell offers this postscript at L'Agefi
Is there no end to the unhappy saga of banks’ loss of prestige? The suitability of the London Interbank Offered Rate, known to its familiars as Libor, as a benchmark interest rate is now being called into question. The reason is that banks themselves supply the figures upon which Libor is based—and now do not trust them.

Meanwhile the job cuts have started