Libor to end in 2021 as FCA says bank benchmark is untenable

london — Libor, the benchmark underpinning more than $350 trillion of financial products, will be phased out by the end of 2021, as UK regulators and banks look to replace the scandal-tarred indicator with a more reliable system.

Andrew Bailey, the head of the Financial Conduct Authority, said on Thursday that the rate isn’t sustainable because of a lack of transactions providing data. Libor became a byword for corruption after traders were caught manipulating the benchmark, leading to about $9 billion in fines and the conviction of several bankers.

“We do not think we will complete the journey to transaction-based benchmarks if markets continue to rely on Libor in its current form,” Bailey said in a speech at Bloomberg’s London headquarters. “Panel bank support for current Libor until end2021 will enable a transition that can be planned and can be executed smoothly.”

The London interbank offered rate, or Libor, is behind securities including student loans and mortgages. The benchmark is the average rate a group of 20 banks estimate they’d be able to borrow funds from each other in five different currencies across seven time periods, submitted by a panel of

Panel bank support for current Libor until end-2021 will enable a transition that can be planned and can be executed smoothly Andrew Bailey, head of Financial Conduct Authority

lenders every morning. Its administration was overhauled in the wake of the scandal, with Intercontinental Exchange taking over from the then-named British Bankers’ Association with the aim of making the rate more transaction-based.

But the 58-year-old Bailey said the market supporting Libor — where banks provide each other with unsecured lending — was no longer “sufficiently active” to determine a reliable rate and alternatives must be found. For one currency and lending period there were only 15 transactions in 2016, he said.

“The absence of active underlying markets raises a serious question about the sustainability of the Libor benchmarks,” said Bailey, who is widely seen as a candidate to be the next governor of the Bank of England. “If an active market does not exist, how can even the best run benchmark measure it?”

The search for a new benchmark may lead to tighter swap markets, lower rates and richer attorneys as contracts need to be rewritten and adjusted to remove Libor.

“The impact of this decision from the FCA is to put uncertainty into all Libor-based swap rates,” said Peter Chatwell, head of European Rates Strategy at Mizuho International in London. — Bloomberg