The Banks’ Biggest Fear? Facing Reality

Monday, April 21, 2008 4:33 p.m. EDT

Days after banks were warned not to fudge a benchmark lending rate, it has shot up.
Now trillions in loans could be affected, pushing up costs for borrowers across the board, perhaps even crimping a potential recovery.

It all started in Europe, where a flap arose around what’s called Libor, short for the London interbank offered rate. It’s the rate at which banks borrow amongst themselves.

The British Bankers’ Association decided to speed up its investigation into whether members were deliberately understating their borrowing costs. The theory was, any bank that reported a slightly higher rate could be seen as desperate, possibly in trouble.

That happens "even if that bank is simply being more realistic than its peers in its estimate of actual term deposit rates on that day,â€