Libor Hits US Borrowers

The troubles of banks in Europe are pushing up an interest rate widely used in the U.S., prompting the idea of a U.S.-based alternative to that rate, known as the London interbank offered rate, or Libor. The problem: Payments on trillions of dollars in U.S. corporate and mortgage loans are set according to dollar Libor, but only three of the 16 banks that contribute their borrowing costs to calculate the rate are based in the U.S. That means the financial difficulties of European banks are having an outsized effect on U.S. borrowing costs, and could complicate the Federal Reserve's efforts to bring those borrowing costs down. A significant gap between borrowing rates reported by European and U.S. banks has opened up since last week, when many banks started raising their reported Libor rates. The banks' moves came as the British Bankers' Association, which oversees Libor, said it was investigating bankers' concerns that their rivals were understating their actual borrowing costs to avoid looking desperate for cash. On Friday, the gap between three-month dollar Libor and the average three-month borrowing rates for U.S. banks in the 16-bank Libor dollar panel reached 0.04 percentage point, its highest level since the financial crisis began in August. If sustained, that would represent an added $2.8 billion in annual interest costs on some $6.9 trillion in U.S. corporate and subprime-mortgage debt tied to Libor. It has since fallen, but analysts said it ultimately could increase to 0.10 percentage point as European banks' difficulties become fully reflected in their Libor quotes. Analysts attribute the sharper rise in European banks' borrowing rates to the fact that they're scrambling for dollars to pay off dollar-denominated debts. Pressure is particularly acute in Europe in part because it lacks analogs to such U.S. institutions as Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which provide U.S. banks with access to additional funding.