Economy - Monkey Money business in London?

Kat passed along this Financial Times article that states the banks are looking to legally switch the rules on their loan agreements due to the credit market turmoil:

A growing number of banks are concerned that Libor – a benchmark for interbank borrowing costs and the base for calculating the interest rate for many corporate loans – is no longer accurate in reflecting their actual funding costs.

Some are now considering whether they can invoke a “Market Disruption Clause” in loan agreements on certain undrawn credit facilities, allowing to charge higher interest rates to borrowers...

A potential headache for banks is that many such facilities will have been agreed before the recent worsening in credit conditions at a fixed rate over Libor that may now be lower than a bank’s all-in cost of funding that facility.

LIBOR, or the Londin Interbank Offered Rate is the weighted average interest rate for unsecured short term loans offered to member banks. It is an anchor rate that is used to assess risk. Most commerical variable rate loans are based on LIBOR + X points. For instance, the AIG federal loan/bail-out is priced at LIBOR +850 basis points.

However LIBOR has been acting funky as I noted last May.

The numbers were looking to be junk as banks were lying about their costs by understating the rates they were paying. And this would lead to several significant problems. The most apparent would be an increase in adjustable rate mortgage costs as half of American ARMs are tied to the LIBOR rate, but more systemically, it was a symptom of a fouled up credit market....

Bloomberg reports that the garbage truck is arriving and is picking up the crap information through the form sanctions and banning of access to cheap credit:

The BBA, an unregulated London-based trade group, sets Libor by polling 16 banks each day on the rates they pay for loans in dollars, British pounds, euros and eight other currencies. The association is under pressure to show the rates are reliable following complaints by investors that financial institutions weren't telling the truth....

Libor rates jumped after the BBA said April 16 that any member banks found to be misquoting rates will be banned. The cost of borrowing in dollars for three months rose 18 basis points to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze last August.

By definition, the LIBOR rate should be roughly the rate of capital, so a loan premised on LIBOR + X should be the cost of capital plus a risk premium. I can understand banks wanting to rejigger their risk premium asks as risk is becoming more apparant. However, the piece that the cost of capital is not being reflected by LIBOR rates seems to suggest that there is still massive uncertainity and/or fraud floating in the system as different banks may or may not be putting lipstick on their fiscal pigs.

Source : Newshoggers