Banks identify possible replacements for U.S. Libor
By Richard Leong
NEW YORK (Reuters) - A group of global banks and clearing houses, working with U.S. regulators, said on Friday it has identified two possible replacements for Libor, the benchmark interest rate for $160 trillion worth of credit for everything from home mortgages to corporate loans.
The Alternative Reference Rates Committee (ARRC) said that together with the Federal Reserve it has identified the Fed's Overnight Bank Funding Rate (OBFR) and the overnight rate on U.S. Treasury securities pledged as collateral in repurchase, or repo, transactions as alternatives.
The London Interbank Offered Rate has been in regulators' cross hairs since its credibility was tarnished by a rate-rigging scandal emerging from the 2008 financial crisis. About a dozen global banks collectively have paid tens of billions of dollars in fines to settle the matter.
"The case for moving ahead to a new benchmark is very strong. The new benchmark is going be robust with a lot of transactions and will be resistant to manipulation," Fed Governor Jerome Powell told Reuters.
ARRC said the two rates it identified as replacements represent "robust" markets, each with $300 billion worth of daily trades. Bankers and regulators have raised alarms about diminishing daily liquidity in the markets for unsecured loans like Libor, calling into question their reliability as a gauge for U.S. borrowing costs.
The stakes are large: Libor's benchmark 3-month rate stands as a reference rate for pricing $160 trillion of loans in the United States and, together with companion rates in Europe and Asia, has some $350 trillion of global credit tied to it.
"Having a viable rate alternative is important to financial stability especially if Libor activity were to cease at some point," Sandie O'Connor, the committee's chair and chief regulatory affairs officer at JPMorgan Chase (JPM.N) said on a call with reporters.
The group proposed a framework to phase in the new reference rates to minimize disruptions to financial markets. The plan would allow Libor-linked transactions to exist while the new benchmarks gain acceptance by dealers and investors.