Cen­tral banks want li­bor re­placed with sev­eral rates

The Pak Banker - - FRONT PAGE -

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, Royal Bank of Scot­land (RBS) 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 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. " In cer­tain cases, cen­tral banks or su­per­vi­sory au­thor­i­ties could be­come more ac­tively in­volved in pro­duc­ing ref­er­ence rates," the report said.

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