LONDON–Libor, the benchmark rate that is tied to more than $350 trillion in derivatives, corporate bonds and other financial products, is on its way out even as regulators acknowledge the challenge in finding a replacement.
According to the CFPB, Libor is the most commonly used index in setting mortgage rates in the U.S.
The Libor, or London Interbank Offered Rate, has been in use since the 1980s when banks in the U.K. were looking for a uniform benchmark across various financial products, rather than continuing to use various currencies and interest rates.
But in recent years the Libor has been tied to a number of scandals at some of the world’s biggest banks as those banks were accused of adjusting their Libor submissions to benefit themselves and their traders’ positions, rather than reflecting the rates at which they were actually making loans to one another. Several billion-dollars in fines have been paid as a result. Under Libor, banks submit the rates at which they would be prepared to lend money to one another, on an unsecured basis, in various currencies and at varying maturities.
Now British regulators have said they want to phase out the Libor by 2021 and replace it with new measures that more accurately reflect lending standards.
Andrew Bailey, the CEO of Britain’s Financial Conduct Authority, told The New York Times that Libor is “no longer sufficiently active” for it to continue as a benchmark.
“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 remarks given at Bloomberg L.P.’s offices in London. “And while we have given our full support to encouraging panel banks to continue to contribute and maintaining Libor over recent years, we do not think markets can rely on Libor continuing to be available indefinitely.”
But the regulator also acknowledged that few alternatives currently exist and that details for any replacement still need to be worked out.