… via Bloomberg:
Banks That Misquote Money-Market Rates to Be Banned (Update1)
By Ben Livesey
April 16 (Bloomberg) — The British Bankers’ Association said it will ban any member deliberately misquoting lending rates at daily money-market operations amid concern that some contributors are providing misleading quotes.
The global credit squeeze has raised concern lenders have been manipulating the so-called fixing process to prevent their borrowing costs from escalating, the Bank for International Settlements said in March. Participants have complained to the BBA, the Wall Street Journal said today, citing a person familiar with the matter. The BBA holds its annual board meeting today.
“It’s very important to us that we preserve the integrity of the figures,” said Lesley McLeod, a BBA spokeswoman in London. “It’s something we have been looking at. If we find that people have been putting in figures which don’t reflect accurately their financial figures, the ultimate sanction is to throw them out of the pond.”
The BBA asks 16 member banks every morning to say how much it would cost them to borrow from each other for 15 different periods in currencies including dollars, euros and pounds. It then calculates averages, known as the London interbank offered rates, or Libor, which are used as benchmarks for companies, lenders and investment banks around the world.
“Libor will survive, although its credibility is severely weakened,” Paul Calello, Credit Suisse Group’s head of investment banking, said in a speech at the International Swaps and Derivatives Association annual conference in Vienna today. “Continuing to base an enormous amount of derivative contracts on an index with credibility problems is a serious issue we must address.”
Money-market rates began surging last year as the fallout from the U.S. housing slump left banks wary of lending to all but the safest borrowers. The three-month dollar rate was at 2.73 percent today, the highest since April 3, according to BBA data. That’s 48 basis points more than the Federal Reserve’s target rate for overnight lending between banks, compared with an average of 11 basis points in the first half of last year.
Liquidity concerns, the cost of wholesale market borrowing and Libor rates will be discussed at today’s annual board meeting, McLeod said. The BBA holds a review of its daily money market operations every year, concluding in June.
`Calls Coming Down’
Eurodollar futures contracts, which are based on traders’ expectations for three-month dollar Libor, rose today amid concern that rates may increase at tomorrow’s fixings as banks exercise more care when giving quotes, said Ian Lyngen, an interest-rate strategist at RBS Greenwich Capital in Greenwich, Connecticut. The implied yield on the contract expiring in June climbed 13 basis points to 2.69 percent.
“The risk is that there are calls coming down from the highest level of the 16 different banks associated with the Libor process saying this better not be us and if it is, it better not be us tomorrow,” said Lyngen. “Some people have estimated that there is up to 30 basis points of inaccuracy in Libor rates. We might find out tomorrow what it really was.”
Money markets would benefit from increased transparency and “trimming,” or the discarding of extreme rates quoted by participating banks, the Basel, Switzerland-based BIS said in a study released in March with its quarterly report. The system still worked as it was meant to do when rates started rising last year, it said.
“The design worked as intended to moderate the influence of strategic behavior and changing perceptions of credit quality,” researchers Jacob Gyntelberg and Philip Wooldridge wrote. The divergence of rates quoted for different currencies “reflected dislocation in the underlying interbank markets more than shortcomings in the design of the fixing mechanisms.”
This will be fixed soon one way or another. Any bank that gets kicked out of the BBA for fudging its Libor rates will very quickly become the next Bear Stearns.
And the USD will be further besmirched.
Note that gold has rallied >2% in the last two days. We’re headed for $1150.