The U.S. Federal Reserve will accelerate its search for a substitute to the Libor benchmark interest rate to stave off what would be "a horrible mess" if the current system collapses with no alternative, Fed Governor Jerome Powell said on Thursday.
The unsecured interbank lending market on which Libor—the London interbank offered rate—is based "has been in a secular decline," making it difficult for banks to credibly set the benchmark lending rate that has been wired into an estimated $150 trillion in dollar-based contracts worldwide, Powell said in remarks prepared for delivery at a New York University financial conference.
"Is it wise to rely on a critical benchmark that is built on a market in decline? Clearly not," said Powell, the Fed's representative on an international panel charged with revising the system of reference rates used in financial contracts. If the daily estimate of Libor "were to become untenable, or if we were to simply 'end Libor,' ... untangling the $150 trillion in outstanding U.S. dollar Libor contracts would entail a protracted, expensive and uncertain process."