With Libor stuck obstinately at levels well above official bank rates, the latest speculation surrounds whether the interbank lending rate should in fact be higher.
The suspicion is that banks’ are managing the reports of their short-term borrowing costs downwards in order not to appear desperate for funds.
The WSJ adds, while acknowledging that there is no specific evidence that banks have provided false information:
The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That’s good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.
Scratch that. It’s bad for everyone, says Yves Smith. Doubt about Libor throws the TED spread into doubt, which as the difference between Libor and ninety-day Treasuries is a popular measure of stress in the interbank markets. It means that ugly as that market has looked this year, it’s actually uglier.
When these staple statistics and benchmarks are called into doubt, the uncertainty and ensuing difficulty in planning means another deterrent to investment.
The BBA, which oversees Libor, reviews the composition of the rate and the “panel” of banks that send in data annually. This year’s review will finish in June. Libor will almost certainly be discussed at a BBA board meeting on Wednesday, although the meeting is a regular, scheduled one.
But doubts about the official Libor rate may be masking, or at least muddying, changes in the markets which us the benchmark as a reference.
Tom Freke, from Loan Radar, notes that even if banking not funding at Libor is a blip, it is having effects on loan pricing. If Libor plus 50bp, no longer gives the banks 50bp over the rate they are funding at, investment grade funding is going to have to rise both against the tarnished reference rate and overall.
One move would be for banks to use an alternative reference from which to price their wares. Freke thinks a better alternative doesn’t naturally present itself. The WSJ offers up the rates set by central banks for loans and the rates on repo agreements. Would those work? The latter has had its own troubles.
