NEW YORK (Reuters) – Top U.S. officials were briefed in April 2008 on the possibility banks were under-reporting their borrowing costs, although an employee at Barclays raised concerns with the New York Federal Reserve Bank as early as August 2007, documents released by the New York Fed on Friday showed.
The New York Fed, the U.S. central bank’s eyes and ears on Wall Street, said an analyst with its Markets Group was told by an employee at London-based bank Barclays on April 11, 2008, that the bank was under-reporting its borrowing costs. The Barclays employee told the New York Fed that he believed other banks were doing the same, the regional Fed bank said.
On the same day, the Markets Group reported on the questions that had been raised about the accuracy of the borrowing cost benchmark — the London interbank offered rate — in a briefing memo for top officials, it added.
Libor is a global benchmark used for $550 trillion of interest rate derivatives contracts, and it influences rates from mortgages to student loans to credit cards.
“In accordance with standard practice for briefing notes produced by the Markets Group, this report was circulated to senior officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and U.S. Department of Treasury,” the New York Fed said.
More than a dozen banks, including Citigroup, JPMorgan Chase Co and Deutsche Bank, are under investigation by authorities in Europe, Japan and the United States over suspected rigging of Libor.
Barclays is the only bank so far to admit any wrongdoing in giving false information as part of the complex process of setting the interest-rate benchmark, and it agreed in a settlement announced in late June to pay fines of $453 million to U.S. and British authorities.
The New York Fed issued a news release and related documents that detailed discussions on Libor on its website on Friday, in part to respond to a request for information from a U.S. lawmaker.
One email to the New York Fed showed that an employee at Barclays had raised suspicion that banks were under-reporting their borrowing costs on August 28, 2007.
“Today’s USD libors have come out and they look too low to me,” the employee said. “Draw you own conclusions about why people are going for unrealistically low libors.”
August 2007 was the early days of the financial crisis that stretched into 2009. A lack of liquidity in financial markets was putting upward pressure on bank borrowing costs, and central banks, including the Fed, acted to ensure commercial banks had ample liquidity.
In its April 2008 memo to top officials, the New York Fed’s Markets Group suggested that Barclays was not the only bank that may have been reporting lower-than-actual borrowing costs to the British Bankers’ Association, the group responsible for Libor.
“Our contacts at LIBOR contributing banks have indicated a tendency to under-report actual borrowing costs when reporting to the BBA in order to limit the potential for speculation about the institutions’ liquidity problems,” the memo said.
(Reporting by Jonathan Spicer and Katya Wachtel in New York and Rachelle Younglai in Washington; Writing by Tim Ahmann; Editing by Tim Dobbyn)