Six Banks Set LIBOR

Credibility falling for benchmark rate on narrow pool of submissions

In the wake of the scandal that revealed LIBOR under manipulation by banks all over the world, the benchmark lending rate is suffering a credibility gap even as a smaller core group of banks contributes to setting the rate.

Bloomberg reported Monday that the interbank lending rate is now basically set by a total of six banks, something that did not happen before the scandal erupted while 18 banks still submitted daily rates for consideration. And even as the pool of banks has shrunk, the range of borrowing costs has broadened as more banks require collateral for interbank lending—making the “benchmark” less a measure of reality, perhaps, than it was pre-scandal.

For the past four months, according to data compiled by Bloomberg, the same six banks—Bank of America Corp., Citigroup Inc., Bank of Tokyo Mitsubishi UFJ Ltd., Royal Bank of Canada, Sumitomo Mitsui Financial Group Inc. and Lloyds Banking Group Plc—have been the rate setters nearly every day, something that two years ago was unheard of.

A total of 18 banks have been designated as contributors to the rate, and the top four highest and lowest are stripped out as a matter of routine. In 2012, none of those 18 banks made it into the final rate every day. However, in the four months since June 6, Bank of America, Citigroup, BTM and RBC made it into all 87 of the fixings. Sumitomo’s data missed being used once; Lloyds’s, twice—both times last week.

Citigroup’s estimate, 0.45%, was unchanged till the end of July, when it started to fall. As of Oct. 5 it was 0.34%. BTM’s was 0.46% till July 27, falling after that to 0.35% by last week, and Bank of America left its submission unchanged from 0.47% till Aug. 2. On Oct. 5 it submitted a rate of 0.39%.

Other banks, such as HSBC Holdings Plc at the low end of submissions and Société Générale SA and Credit Agricole at the high end, have been shut out of the LIBOR process—the latter two for the past four months.

LIBOR is supposed to indicate the cost of unsecured lending between banks, but more and more, banks are requiring collateral before they will part with funds. Because of that, the gap between highs and lows has increasingly grown, with the same institutions always in the middle, determining the rate and the others cut out of the process.

In 2011, highest and lowest submissions were separated by a mere 0.1% over the four months from June through September; this year, the gap has grown to an average of 0.32%.

“You have a core group setting the rate and that’s a major concern,” said Bret Barker in the report. Barker, a money manager at Los Angeles-based TCW Group Inc., which oversees $128 billion, added, “It’s going to be very tough to fix that and very tough to replace LIBOR.”

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