Central banks want Libor replaced with several rates

Mon Mar 18, 2013 4:08am EDT
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

LONDON (Reuters) - 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 on Monday.

Barclays BARC.L, Royal Bank of Scotland (RBS) RBS.L and UBS UBSN.VX 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 on Monday 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.

Some regulators remain cautious about a rapid shift to market-based transactions, given the huge volume of contracts still using Libor, while others say that such a move is overdue.   Continued...

 
Bank of England Governor Mervyn King delivers a speech at his lecture meeting hosted by the Japan Bankers Association in Tokyo February 26, 2013. REUTERS/Issei Kato