Libor under review as rate's credibility scrutinised

By Jane Baird

VIENNA (Reuters) - The British Bankers Association has accelerated a review of how LIBOR -- a key reference interest rate -- is set, as one senior investment banker said the system's credibility had been hit hard.

The London Interbank Offered Rate <LIBOR=>, hit by a breakdown in funding during the credit crisis, is likely to survive but with its "credibility severely weakened," said Paul Calello, chief executive of the investment bank at Credit Suisse (CSGN.VX: Quote, Profile, Research).

"Continuing to base an enormous amount of derivative contracts on an index with credibility problems is a serious issue we must address," he told the annual meeting of the International Swaps and Derivatives Association in Vienna.

LIBOR is a daily reference rate published by the BBA based on the interest rates at which banks offer to lend unsecured funds to each other in ten major currencies in the London interbank market.

It is a key global benchmark for short term interest rates and is used as the basis for settlement of interest rate contracts on many of the world's major futures and options exchanges.

It has become distorted due to the turmoil in the money markets, with banks becoming unwilling to lend to each other as they fear others may have hidden losses related to the U.S. subprime mortgage crisis.

The BBA said it would exclude from the process any banks that distort the market and had launched a review of the process, but gave no indication of when it would be completed.

"The BBA will ensure that dollar BBA LIBOR continues to be a transparent, objective, accurate rate," a spokesman said.