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EU bank group plans price benchmark, will rival Libor - Finance News - London South East


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EU bank group plans price benchmark, will rival Libor
Mon, 16th May 2011 18:02




By Francesco Guarascio and John O'Donnell

BRUSSELS, May 16 (Reuters) - A European banking group plans to launch a price benchmark to set the cost of interbank and corporate lending, challenging the London interbank offered rate pricing scheme which is being investigated on suspicion it was manipulated to cool the financial crisis.

The move to establish an alternative benchmark is being led by the European Banking Federation and follows growing frustration among some EU banks about their lack of input into the London interbank offered rate (Libor).

They are concerned by what they see as a domination by investment banks and other big lenders from the City of London of a price-setting process that dictates the cost of trillions of dollars of bank and company borrowing.

'We are testing the project over the summer and plan to launch in early September,' said Cedric Quemener, the manager in charge of the project.

'We are also talking to banks from China and Japan about their involvement in the project.'

'Our ambition is to have as large a panel of banks as possible -- roughly 24 banks will be surveyed for price information,' he said.

Libor polls roughly 16 banks, a survey some feel is too narrow.

'We want to cover banks across all of the European Union with more continental players,' Quemener said.

The move is also a result of concerns that the City of London and investment banks have too much say in the survey that sets Libor, a benchmark borrowing price based on their assessment of lending costs.

'It's a lesson learned from the financial crisis,' said one banker who supports the initiative.

Regulators are already probing whether a handful of major banks manipulated the global benchmark.

A person familiar with the matter has identified Bank of America, Barclays, Citigroup, WestLB and UBS as the focus of the investigation by regulators in Britain, Japan and the United States.

Investigators are probing whether banks understated Libor to reduce their borrowing costs and downplay investor panic during the financial crisis.

About $350 trillion worth of financial products globally reference Libor, and lower levels for the rate could have robbed lenders and investors of significant amounts of interest income. Borrowers, on the other hand, would have benefited.

The five large banks under investigation contribute to a daily survey conducted by the British Bankers' Association (BBA) on what they charge each other to borrow dollars and other currencies.

At the end of each business day, the London interbank offered rates are calculated by the BBA.

Libor rates spiked during the financial crisis but were widely criticized at the time for not having risen enough to reflect market pricing. The system relies on banks providing honest prices and the price provided by each bank being transparent.

Thomson Reuters compiles and publishes the data on behalf of the BBA. Reuters News is part of Thomson Reuters.

Thomson Reuters, which collects the data for Libor pricing, is also set to do the same for the new dollar benchmark, USD Euribor, an extension of the existing euro-lending pricing benchmark, said one source involved in the project.

(Editing by Susan Fenton) Keywords: EUROPE LIBOR/

(Reporting by Francesco Guarascio and John O'Donnell, +32 2 287 6817 or +32 473 92 48 90; john.odonnell@thomsonreuters.com)

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