BBA says to beef up supervision of its Libor rates

NEW YORK/LONDON (Reuters) - The group in charge of setting Libor interest rates said on Friday it will strengthen oversight of the global interbank lending benchmark, months after it became seriously distorted by the credit crisis.

The British Bankers Association said on its website that details will be published in "due course," adding it had made no changes to the list of banks that contribute to its rate-setting process for London interbank offered rates, known as Libor.

The BBA brought forward its annual review by around a month, after facing growing criticism that its Libor rates priced in U.S. dollars understated true bank-to-bank borrowing costs. Some had called for the BBA to raise the current number of U.S. bank contributors to more than three out of 16.

Inter-bank lending costs have soared since the credit crisis broke last summer as financial institutions grew wary of lending to one another. Libor, however, has fallen dramatically over the course of the crisis. On Friday, it fell as U.S. investment banks held onto their cash ahead of the end of the quarter.

The BBA's review had been widely expected to recommend tweaks rather than drastic changes to the process of deriving its benchmark rates so as not to destabilize markets that use Libor as a reference.

"This is even a smaller band aid than expected. ... It's frustrating to see people who don't understand how bad the situation is," said Christopher Low, chief economist at FTN Financial in New York.

About $150 trillion (75 trillion pounds) worth of financial products around the world -- everything from auto loans to corporate debt -- are indexed to Libor.

Market participants had reckoned the potential changes the BBA could unveil might include: increasing the number of banks in the BBA's daily survey; using a median rather than a trimmed mean to calculate the Libor rate; including more U.S. banks on the rate-fixing panel; altering the survey question to shift the definition of the rate; changing the time of the fix from 11 a.m. London time to better align it with the U.S. market; creating an indexed-like Euribor for the dollar.

Because banks do not currently need to prove they can trade at the yields they submit to the BBA survey, some analysts also believe the BBA may base the fixing of its Libor rates on traded ones.