Libor is on its way out as the interest rate used to value trillions of dollars of financial products and eventually will be replaced by a benchmark based on actual transactions, according to the governor of the Bank of England.
Mark Carney told financiers that a shift towards a market rate backed by real money and not bankers’ judgments was “necessary and . . . would happen”.
In minutes released by the Bank yesterday, Mr Carney made the case for the eventual abandonment of Libor as a reference rate and a transfer instead to Sonia, or the sterling overnight index average, which is fixed against lenders’ overnight cost of funding. Libor has been subject to extensive reforms in the five years since the rate-rigging scandal first made headlines in the wake of Barclays’ admission that it had tried atto manipulate the rate. However, Mr Carney said that despite this work, a “judgment-based” benchmark would never be as good as one set against real money.
“Although controls around Libor submissions had become much tighter since 2012, a situation in which a judgment-based benchmark underpinned an estimated $350 trillion of contracts was not desirable,” Mr Carney said, according to the minutes of the July 6 meeting between the Bank and industry figures.
Speaking at the same event, Chris Salmon, executive director for markets at the Bank, said that Libor was “not the most appropriate” reference rate and that its continued widespread use reflected a “concentration of liquidity in Libor instruments, a situation that was self-reinforcing”.
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“Reducing the system’s dependence on Libor would be challenging,” said Mr Salmon, who has led the Bank’s Libor reform efforts. Mr Salmon is the uncle of Tom Hayes, the first banker jailed for rate manipulation.
François Jourdain, a Barclays banker and chairman of the reference rates working group, said that the industry was working towards the replacement of Libor by Sonia and that big financial institutions had put together panels to discuss how this could be achieved.