Interbank benchmark Libor to be phased out by 2021
SCANDAL-HIT interest rate benchmark Libor will be phased out as the main index in the market by the end of 2021, the Financial Conduct Authority’s chief has announced.
Libor is supposed to indicate the prevailing interest rate at which banks will lend to each other in different currencies and over varying time periods.
In practice, however, few banks lend to other banks for long periods of time and so the index is made up of hypothetical numbers proposed by the participating banks, with an oversight panel checking up on their estimates. Manipulation of the benchmark was uncovered in 2012, with traders fixing the rate to their own benefit, and banks artificially lowering Libor to flatter their own financial reputations.
“The underlying market that Libor seeks to measure – the market for unsecured wholesale term lending to banks – is no longer sufficiently active,” Andrew Bailey said in a speech at Bloomberg.
The FCA chief executive added that there may be little reason to base retail or corporate loans on an index of banking credit risk, and it is often only used because it is already in common use – “a sort of inertia”.
As Libor is in such common usage and contracts are based on the benchmark, it will take time to practically shift away from the index. But Mr Bailey is keen to set a target date as a way to push banks and their customers into making the change. The UK markets are likely to shift to the overnight rate Sonia, which is based on transactions.