BBA to enhance confidence in Libor

The British Bankers Association (BBA), which sets the most widely tracked London Interbank Bid Rates (Libor), yesterday announced steps to boost confidence in its criticised benchmark rate, while a big bond dealer launched an alternative measure of borrowing costs for banks with offices in the US.

The BBA said it would expand the number of contributors to its London interbank offered rates and would consider a second daily "fixing" of dollar Libor during US market time. Currently, the rates are fixed, or published, each morning at about 1045 GMT. The same day London-based broker Icap said it would launch its own gauge of lending rates for banks with offices in the US.

Icap, which says it is the world's biggest middleman for the bond market, will publish results of its daily rate survey, called the New York Funding Rate, beginning Wednesday morning.

Some market participants had called for an alternative US rate benchmark to Libor because Libor's reliability has been questioned during the current global credit crisis.

The market for short-term loans from one bank to another, that grew out of the US real estate slump and the subsequent collapse of the risky subprime mortgage market, has been stressed.

Nearly a year into the global credit crunch, banks are still hesitant to lend to each other as huge losses suffered on soured mortgage investments have forced them to retain capital and as they distrust the financial health of counterparties.

Just on Tuesday, the interbank cost of borrowing three-month dollar funds posted its biggest rise since August 9, the day the global financial crisis erupted, as banks grappled with the prospect of rising interest rates.

Market participants are likely to view the New York Funding Rate with some scepticism until its volume grows. A daily NYFR poll to set the rate "will be conducted during the New York morning when the Eurodollar market is most active", said Icap in a statement.

The survey will ask banks for market rates as of 9.15am (1315 GMT), while the results will be calculated by 10am (1400 GMT) and disseminated shortly after that, Icap said. John Ewan, head of the BBA's Libor group, said the focus of the changes being considered centre on dollar Libor as that's where most concern is. "That's the one people are paying the most attention to," he said at the BBA's annual conference in London.