Global banks proffer alternatives to Libor standard
Print Edition
A GROUP of global banks and clearing houses, working with US regulators, said on Friday it has identified two possible replacements for Libor, the benchmark interest rate for US$160 trillion worth of credit for everything from home mortgages to corporate loans.
The Alternative Reference Rates Committee (ARRC) said that together with the Federal Reserve it has identified the Fed’s Overnight Bank Funding Rate (OBFR) and the overnight rate on United States Treasury securities pledged as collateral in repurchase, or repo, transactions as alternatives.
The London Interbank Offered Rate has been in regulators’ crosshairs since its credibility was tarnished by a rate-rigging scandal emerging from the 2008 financial crisis. About a dozen banks collectively paid tens of billions of dollars in fines to settle the matter.
“The case for moving ahead to a new benchmark is very strong. The new benchmark is going be robust with a lot of transactions and will be resistant to manipulation,” Fed Governor Jerome Powell told Reuters.
ARRC said the two rates it identified as replacements represent “robust” markets, each with US$300 billion worth of daily trades. Bankers and regulators have raised alarms about diminishing daily liquidity in the markets for unsecured loans like Libor, calling into question their reliability as a gauge for US borrowing costs.
The stakes are large: Libor’s benchmark three-month rate is a reference rate for pricing US$160 trillion of loans in the US and, together with companion rates in Europe and Asia, has about US$350 trillion of global credit tied to it.
“Having a viable rate alternative is important to financial stability especially if Libor activity were to cease at some point,” Sandie O’Connor, the committee’s chair and chief regulatory affairs officer at JPMorgan Chase told reporters.
The group proposed a framework to phase in the new rates to minimize disruptions to financial markets. The plan would allow Libor-linked transactions to exist while the new benchmarks gain acceptance by dealers and investors.
“The ARRC envisions a paced transition focusing on new transactions rather than a ‘big bang’ that would seek to change existing trades,” it said in a reported released on Friday.
ARRC comprises 15 global banks that are also interest rate derivatives dealers along with the Fed, the US Treasury Department, Commodity Futures Trading Commission and New York Fed.
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