Today’s Wall Street Journal argues that three-month dollar LIBOR fixings compiled by the British Bankers’ Association (BBA) may understate true interbank borrowing costs by as much as 30 basis points. The suggestion is that some banks on the BBA panel are failing to report actual borrowing rates for fear of alerting markets to financing difficulties.

The chart below shows the spread between three-month dollar and sterling LIBOR fixings and an average of offer rates quoted by the interdealer brokers ICAP and Tullett Prebon – these should reflect actual borrowing costs The BBA dollar fixings do indeed look low relative to broker rates, although the divergence is smaller than suggested in the WSJ article – 14 basis points yesterday. However, the issue is much less significant for sterling rates, with a gap of just 1 bp yesterday.

The divergence in dollar rates is puzzling but seems unlikely to reflect BBA banks deliberately understating borrowing costs, since this would be expected to affect sterling rates by a similar amount.