Banks Mull Bailing on Libor in Loans as ICE Adds Licensing Fees

Some banks may stop using Libor as a benchmark for interest rates on loans because of new licensing fees being charged by Intercontinental Exchange Inc., which this year took over administering the measure, according to the American Bankers Association.

ICE introduced licensing agreements on July 1 for referencing the benchmark used to create more than $300 trillion of securities, loans and derivatives, including a usage license that ranges from $8,000 to $40,000 a year. Previously, Libor was free except for companies wanting to redistribute the rates, which paid an annual fee to the British Bankers’ Association.

“There’ve been a number of banks saying they may stop using Libor,” Denyette DePierro, senior counsel at ABA, said in a phone interview. While it’s not clear how broadly ICE will apply the new fees, they appear to be triggered by essentially all uses of the benchmark -- from a bank having a single old loan on their books to them choosing to participate in syndications or signing derivatives agreements, she said.

“Everybody’s kind of waiting to see what ICE is going to do, and, from a cost-benefit perspective, do you continue with Libor or not?” said DePierro, whose organization lobbies on behalf of the $14 trillion U.S. banking industry.

The way Libor is constructed came under scrutiny in recent years as regulators across the world probed banks and brokers over allegations traders manipulated key market benchmarks for profit. At least nine firms, including UBS AG, the Royal Bank of Scotland Plc and ICAP Plc, have been fined more than $6 billion for manipulating benchmark interest rates such as Libor, according to data compiled by Bloomberg.

Automating Libor

Under the BBA’s oversight, Libor was calculated by a daily poll that asked firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. ICE is updating and improving that process, adding automation and the ability to audit the results. It’s also working to include more transactional rates into the calculation.

The new license fees may affect many of the almost 7,000 banks and about 800 firms managing registered investment funds in the U.S., according to Federal Deposit Insurance Corp. and Investment Company Institute data. Libor is used globally as well, with firms worldwide falling under the new ICE contract. Hedge-fund managers oversee more than 10,000 individual funds and funds of funds, according to Hedge Fund Research Inc.

Bloomberg LP, the parent company of Bloomberg News, is subject to new ICE fees because it distributes Libor rates to its customers.

JPMorgan, Barclays

Banks that contribute Libor rates to ICE, including JPMorgan Chase & Co., Bank of America Corp. and Barclays Plc, won’t be charged the new fees, according to ICE.

A Mortgage Bankers Association spokesman, John Mechem, said the group “has been in discussions with ICE to highlight the impact that the proposal would have on the market.” Libor rates are the most common benchmarks for U.S. adjustable-rate mortgages, including ones sold to government-backed Fannie Mae and Freddie Mac. Spokesmen for the companies or their overseer, the Federal Housing Finance Agency, declined to comment or didn’t immediately respond to e-mails.

ICE is open to changing the way it charges to use Libor, Chief Executive Officer Jeff Sprecher said on an Aug. 7 conference call to discuss earnings.

“These are relatively modest licensing fees for major users of Libor,” he said. “We continue to take input from people. We’re fine tuning it,” Sprecher added. “It’s amazing how broad the use of Libor is in the world. So we’re getting a lot of feedback from different kinds of users on how they use Libor. And that’s informing our licensing practices, which we continue to evolve.”

No Surprise

On the other hand, Sprecher said, people shouldn’t be surprised at the new costs associated with making the benchmark less prone to manipulation.

“It’s caught some people by surprise,” he said. “It’s interesting. There has been a lot of criticism by people that they wanted Libor to be better, but then when they’re asked to pay for it, they’re surprised. It shouldn’t be a surprise.”

Brookly McLaughlin, an ICE spokeswoman, said today that her company is “making a substantial investment in IBA in order to strengthen the benchmark and restore the integrity of Libor as an accurate, reliable and trusted benchmark,” referring to the ICE Benchmark Administration division that now runs Libor. “Toward that end we are working closely with the industry as we implement reasonable commercial terms.”

‘A Shock’

The new fees were “a shock to many” small lenders and “will be very problematic for thousands of community banks,” who had no role in the Libor scandal and face unfair costs relative to their use, according to a July 22 letter to ICE’s president by Independent Community Bankers of America President Camden Fine, a copy of which is posted on its website.

“We’re certainly hopeful that they’ll tier it, because it didn’t appear that their fee schedule accommodated different-sized institutions originally,” Chris Cole, an executive vice president at the trade group, said in an interview.

More than 6,500 U.S. community banks exist, according to the group. If each paid $16,000 to use Libor, the minimum amount charged to financial firms, ICE would reap in excess of $100 million annually. That doesn’t account for fees from the thousands of banks, insurance companies, hedge funds and asset managers that reference Libor in swaps contracts.

There are alternatives to Libor. A surge in the rate during the global financial crisis led some companies to switch pricing on corporate loans to using a method called base rates. That measure can make use of Federal Funds Rates, “prime rates” set by individual banks and Eurodollar rates.

“As of right now, I’m definitely hearing banks pausing in adding more Libor-referenced products to their books,” said the ABA’s DePierro.