Central banks eye choice of rates to replace Libor
Source: Agencies |
March 19, 2013, Tuesday
|
Print Edition
Print Edition
THE tarnished Libor interest rate benchmark should be replaced with a range of reference rates based on actual market transactions by banks, a global group of central bankers said yesterday.
Barclays, Royal Bank of Scotland and UBS have all been fined for rigging the London interbank offered rate, which regulators are now reforming.
The rate is compiled by banks submitting quotes for the rates at which they believe they could borrow from another bank. It is used to price products worth trillions of dollars, ranging from home loans to credit cards, but central bankers signaled that its days ought to be numbered.
"It is clear that central banks must play an important role in supporting the development of alternative reference rates," Bank of England Governor Mervyn King said in a statement.
King chairs a committee of central bankers at the Bank for International Settlements, which yesterday published a report on the role central banks could play in creating a choice of rates.
There is demand for greater use of transaction data to produce a range of reference interest rates suitable for different purposes, the report said.
It also said that there should be "robust fallback arrangements" to cover the possibility of a breakdown in the market on which the main reference rate is based. The interbank market, which Libor reflects, dried up completely during the financial crisis of 2007-09.
Central banks can promote alternative rates such as overnight rates and overnight index swaps rates, or general collateral repo rates, the report said. These refer to contracts between banks based on expected interest rates.
Barclays, Royal Bank of Scotland and UBS have all been fined for rigging the London interbank offered rate, which regulators are now reforming.
The rate is compiled by banks submitting quotes for the rates at which they believe they could borrow from another bank. It is used to price products worth trillions of dollars, ranging from home loans to credit cards, but central bankers signaled that its days ought to be numbered.
"It is clear that central banks must play an important role in supporting the development of alternative reference rates," Bank of England Governor Mervyn King said in a statement.
King chairs a committee of central bankers at the Bank for International Settlements, which yesterday published a report on the role central banks could play in creating a choice of rates.
There is demand for greater use of transaction data to produce a range of reference interest rates suitable for different purposes, the report said.
It also said that there should be "robust fallback arrangements" to cover the possibility of a breakdown in the market on which the main reference rate is based. The interbank market, which Libor reflects, dried up completely during the financial crisis of 2007-09.
Central banks can promote alternative rates such as overnight rates and overnight index swaps rates, or general collateral repo rates, the report said. These refer to contracts between banks based on expected interest rates.
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