Under Watch, Libor Rises

The benchmark London interbank offered rate, or Libor, rose recently in a move some analysts attributed to new concerns about the rate's accuracy. Three-month dollar Libor, which is supposed to reflect the rate at which banks lend to one another, rose 0.03 percentage point to 2.68%, its largest increase in over 2 weeks. The move came after the publication of a Wall Street Journal study suggesting banks may have reported flawed borrowing rates used to set Libor. In response to concerns that some banks may have understated their borrowing costs, the British Bankers' Assn., which oversees Libor, has been conducting a review of the rate system. An initial report is expected. One of the world's most important financial indicators, Libor forms the foundation for payments on trillions of dollars in mortgages, corporate debt & other financial contracts. The study analyzed Libor by comparing banks' reported borrowing rates with estimated borrowing rates derived from the market for default insurance, another indicator of banks' financial health. The analysis suggested many banks' reported rates, and dollar Libor itself, were significantly lower than what default-insurance market suggested they should be. Some Wall Street analysts were critical of the Journal's study. In a research note, an analyst at J.P. Morgan Chase & Co. said the Journal's methodology could unduly inflate the banks' estimated borrowing costs, and criticized the use of one-year default-insurance prices to construct three-month borrowing rates. Independent academics have said the Journal's approach was a reasonable way to analyze Libor. If the BBA decides to alter the Libor system, it could choose to change the makeup of the 16-bank panel that provides quotes for dollar Libor. Any such change would be 1st in years. Excluding times when banks were acquired and therefore replaced, there have only been three changes in the panel since 2000. The BBA said it remains confident about the integrity and accuracy of Libor.