Libor, now set by smaller group of banks, losing status as a world benchmark

LONDON: After being rigged by some of the world’s biggest financial institutions, the London Inter Bank Offered Rate ( Libor), the benchmark for more than $300 trillion of securities and loans, is now increasingly being set by a smaller group of banks.
Bank of America Corp, Citigroup , Bank of Tokyo Mitsubishi UFJ, Royal Bank of Canada, Sumitomo Mitsui Financial Group and Lloyds Banking Group’s submissions have been used in setting the rate on an almost daily basis in the past four months, data compiled by Bloomberg show.

Two years ago, none of the 18 designated lenders made it into every fixing of the measure, which excludes outliers by stripping out the four highest and lowest contributions. “You have a core group setting the rate and that’s a major concern ,” said Bret Barker, a money manager at Los Angeles-based TCW Group, which oversees $128 billion of funds. “It’s going to be very tough to fix that and very tough to replace Libor.”

While Libor is supposed to represent the interest rates banks pay each other for short-term loans, the dominance of a smaller group shows the measure is failing to accurately reflect the true health of the financial system and borrowing costs. The UK’s Financial Services Authority recommended on September 28 that Libor have a broader group of contributors, while acknowledging that developing an alternative would be too disruptive to borrowers around the world because the rate is so embedded in the financial system.

Libor’s use stretches from US adjustable-rate mortgages and floating-rate bonds to over-thecounter derivatives, including interest-rate swaps. Traders have said for years that Libor was being rigged. Those suspicions were confirmed in June, when Barclays, Britain’s second-biggest lender by assets, paid a record 290 million-pound ($468 million) fine for manipulating the benchmark.

Bloomberg News has found that at least a dozen banks are being probed by regulators worldwide for allegedly colluding on Libor submissions to profit from bets on derivatives. —Bloomberg “With Libor being such an intrinsic part of the financial system , restoring trust in it is an important step towards the broader task of rebuilding confidence in banking,” Matthew Fell, the director for competitive markets at the Confederation of British Industry , said in an e-mail on September 28.