NEW YORK/LONDON (Reuters) - A new index that shows European banks’ cost to borrow dollars is set to challenge the benchmark status of Libor, which is the subject of a global probe over whether banks manipulate it.
On Monday, Euribor-EBF, whose members are national banking associations in the European Union and has set the Euro Interbank Offered Rate (Euribor) since 1999, launched its dollar Euribor fixings in response to demand from European banks.
But the initial sets of dollar Euribor readings indicate European banks’ borrowing costs for dollars are more than double the levels reported by the older rival, the London Interbank Offered Rate (Libor).
For example, the three-month dollar Euribor was fixed at 0.95714 percent on Monday, compared with 0.46815 percent for the three-month dollar Libor.
The huge gap between the two rates raised skepticism about dollar Euribor, whose high level runs counter to the recent declining trend on what banks charge to borrow dollars.
“I don’t see the near-term usefulness of it,” said Mike Lin, director of U.S. dollar funding at TD Securities in New York.
European banks have sought an alternative to Libor, which began in 1986 and has been overseen by the British Bankers’ Association as a reference for banks and traders who engage in interest rate derivatives.
About 26 years later, Libor is a benchmark for some $360 trillion worth of financial products such as loans, derivatives, mortgages, bonds and interest rate swaps.
“The benefit to replace Libor is huge,” said David Keeble, global head of interest rates strategy at Credit Agricole Corporate and Investment Bank in New York.
However, Libor is at the heart of a global investigation of whether banks colluded in setting the rates.
“Market actors have been calling for such a fixing for the last three years”, Euribor-EBF Chief Executive Guido Ravet said in a statement on the group’s latest rate index.
Dollar-Euribor is the second high-profile attempt to challenge Libor’s benchmark status. Broking firm ICAP IAP.L introduced the New York Funding Rate (NYFR), which has not gained much traction since its launch in June 2008.
The big difference in dollar borrowing costs between Libor and Euribor could be accounted for by the two vastly different group of banks that contribute to calculation of the two indexes, analysts said.
The 18 banks that participate in the dollar Libor panel are a diversified group of global institutions, including France’s BNP Paribas, Germany’s Deutsche Bank AG DBNKGn.DE, Britain’s Barclays plc (BARC.L) and J.P. Morgan (JPM.N).
On the other hand, the 20 banks that report to the dollar Euribor are mostly the smaller, lower-tier European names.
Seven of them are German, while four are Spanish. The dollar Euribor also feature two Chinese banks -- China CITIC Bank (0998.HK) (601998.SS) and Bank of China 60188.SS (3988.HK), as well as Turkish bank Garanti Bank (GARAN.IS).
The lofty dollar Euribor rates partly reflect the lingering tight credit conditions faced by some European banks due to the region’s sovereign debt problem, analysts said.
“Because it’s European banks lending dollars, they’d command a premium when lending a foreign currency,” said Rabobank rate strategist Richard McGuire in London.
“Some of these banks can’t get hold of dollars so easily, so to lend them on, you’d want paying for the privilege,” he said.
Some analysts argue that while some weaker European banks face tough times raising dollars in the open market, the European Central Bank’s pumping more than 1 trillion euros in cheap three-year funds into the bank system since December has greatly alleviated the stress on many banks.
Other indicators in the interest rate and currency markets, besides Libor, suggest the scramble among European banks for dollars has lessened since the end of 2011, when investors were fearful of a messy Greek debt fault.
“It’s a mystery to me. I don’t know how representative they are of the dollar interbank market,” CA-CIB’s Keeble said of Monday’s dollar Euribor levels.
Still, dollar Euribor has another tool for the market to monitor funding stress.
“It’s another index you can watch,” said TD’s Lin. “They are trying to capture another group of banks.”
Until dollar Euribor proves its reliability over the long haul, analysts said Libor will likely retain its benchmark status.
“I don’t think the BBA will be losing sleep on this one,” CA-CIB’s Keeble said.
Reporting by Richard Leong in New York and Kirsten Donovan in London; Editing by Dan Grebler