FCA: ‘Banks to support LIBOR reluctantly until 2021’

All 20 banks in the UK that are regulated by the Financial Conduct Authority (FCA) have committed to supported the present interbank lending rate until it is phased out in 2021, the regulator announced today.

The London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the largest global banks use for calculating rates they offer each other for short-term loans that ensure liquidity in the banking system.

It serves as the first step to calculating interest rates on various loans throughout the world, and there had been recent concerns over its sustainability while the regulator seeks to introduce an alternative system.

Manipulation of the LIBOR rate was seen as a factor in 2008’s banking crisis, and some commentators, including the FCA’s own chief executive Andrew Bailey, pictured above, accepted that it was only a matter of time before it ceased to exist.

Today’s announcement means that the 20 banks, who have pledged to remain on the panels they currently occupy, will afford the regulator valuable breathing space in which to seek a permanent, market-based replacement for LIBOR.

In a speech to media outlets yesterday given at newswire Bloomsberg’s London offices, Bailey said the market that had traditionally made LIBOR functional was not now “sufficiently active”, which raised “serious questions” about its future.

Questions over LIBOR’s sustainability

“We do not think we will complete the journey to transaction-based benchmarks if markets continue to rely on LIBOR in its current form,” warned Bailey.

The FCA clarified that the support of the panels for LIBOR is needed until the end of 2021, by when a transition can be made to alternative rates.

“What I will say this morning does question the sustainability of Libor in its current form, but this is not because we suspect further wrongdoing or have any evidence of such,” said Bailey.

“The absence of active underlying markets raises a serious question about the sustainability of the Libor benchmarks that are based upon these markets.

“If an active market does not exist, how can even the best run benchmark measure it?”

Despite the support for continuing with LIBOR for the time being, the 20 banks, said, Bailey, “feel understandable discomfort about providing submissions based on judgements with so little actual borrowing activity against which to validate those judgements”.

Few will mourn the passing of LIBOR, which has been a key player in so many banking scandals. To date, it has been responsible for about  Libor, is welcome on many levels for regulators. It was linked to some of the banking industry’s largest scandals, leading to about £6.7bn (US$9bn) in fines, plus criminal convictions for a number of bankers who conspired to manipulate the rate.

Societe Generale SA will no longer submit to the US dollar panel, the regulator confirmed, while Credit Agricole SA will stop submissions to the yen one, although banks banks will still contribute to other LIBOR benchmarks.

 

ABOUT THE AUTHOR
Eugene Costello
Eugene Costello has been a journalist for some 20 years, and has written for a wide variety of UK and international newspapers and magazines.

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