Doubts Raised Over London Benchmark Rate

Worldwide, as much as $350 trillion worth of financial products are tied to the London Interbank Offered Rate, or LIBOR. So it was no small concern this spring when some experts questioned whether the rate's daily updates were rigged to be artificially low. Set LIBOR rates too low and borrowers might get an undeserved windfall -- at lenders' expense.

"I think this is potentially a major issue," said Wharton finance professor Jeremy Siegel, adding: "We're talking about the biggest benchmark for short-term loans in the world." Wharton finance professor Franklin Allen said the process for setting LIBOR rates is "probably accurate most of the time. But some of the time it may deviate."

Questions this spring centered on whether some of the 16 banks that contribute data to the LIBOR calculation were reporting lower-than-actual figures to ease doubts about their own financial health. The first concerns were raised by some banking experts in April. Then, in May, The Wall Street Journal reported that its own study showed the LIBOR inexplicably diverging from what other interest-rate data suggested it ought to be.

Currently, the three-month LIBOR is around 2.7 percent, compared to 1.9 percent for three-month U.S. Treasury bills. The three-month LIBOR started the decade at more than 6percent fell to just over 1. 1 percent early in 2003 and climbed to more than 5.6 percent last September before starting back down.

After doing its own investigation, the British Bankers' Association concluded at the end of May that there was nothing wrong with LIBOR reporting. But acknowledging the continuing concern, on June 10 it announced several procedural changes. Those include requiring member banks to justify rate discrepancies, increasing the number of banks it surveys and adding members to the committee that oversees the rate-calculation process. read more....

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