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British Bankers' Association to revamp setting of global borrowing benchmark

British Bankers' Association to revamp setting of global borrowing benchmark

The British Bankers' Association said on Tuesday it plans to increase its scrutiny of banks that contribute to the setting of its global Libor benchmark for the cost of borrowing, amid concerns about how it is set.
The BBA, which represents 230 banks from around 60 countries that operate in Britain, also used its first annual meeting to warn regulators against imposing too strict or overly complex rules on the industry in the wake of the global credit crisis.
The current liquidity squeeze dominated speeches at the meeting in central London, with the crisis shattered confidence within the industry and seen billions wiped off the value of banks' holdings of risky mortgage-backed assets.
The lending freeze led to the collapse and subsequent nationalization of mortgage lender Northern Rock and other banks, including the Royal Bank of Scotland PLC and HBOS PLC, have resorted to multibillion pound share sales to help strengthen their balance sheets.
Bank of England Governor Mervyn King told the meeting that the global economy is "passing through the most prolonged period of financial turbulence that most of us can remember," but he stopped short of a recent assessment by the IMF that the current downturn is the worst since the 1930s, saying it was "too early to judge."
The crisis has also made banks unwilling to lend to one another amid concerns about rivals' exposure to the U.S. subprime market losses, a factor that has increased the cost of borrowing set by the BBA _ the London Interbank Offered Rate, or Libor.
The BBA acknowledged that "as the credit crunch has stressed the market, it has also stressed this benchmark" and said changes would boost confidence in the measure.
It said it would increase checks on banks that contribute to the setting of the rate and also increase the number of banks that report borrowing rates for each of the currencies for which a Libor rate is calculated.
"These changes will further strengthen BBA Libor and the confidence of its many users," Knight said.
The BBA has been calculating Libor rates since 1985, and says they are used to set rates for financial products worth around US$350 trillion.
Bankers have expressed concern that rivals might be understating their true borrowing costs to avoid looking desperate for cash. The BBA said that in future, "any discrepancies in the rates must be justified by individual contributing banks."
Among the criticisms of Libor is the fact that the dollar Libor panel includes largely European banks, making a rate widely used in the U.S. susceptible to financial troubles in Europe.
The BBA said it would increase the number of contributors to some panels. It also said it would consult with banks on whether a second rate-fixing process for U.S. dollar Libor "might be set after the U.S. market opening."
HSBC Holdings PLC Chairman Stephen Green told the 350 delegates to the meeting that banks will have to operate with less leverage in the future.
"The current crisis has taught us something about banking models," Green said. "We've seen stretched balance sheets, short liquidity, and high and every increasing leverage. That is gone."
Green said that the change would not be merely cyclical with banks returning to former positions when market conditions improve.
"This is a secular change," he said.


Updated : 2020-12-03 16:34 GMT+08:00