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Libor, Scandal-Plagued Interest Rate, Could Disappear by 2021

Chris Ratcliffe | Bloomberg via Getty Images

British regulators said on Thursday that they wanted to phase out a scandal-plagued benchmark interest rate known as Libor by 2021, replacing it with new rates closely tied to more active markets for loan transactions.

The London interbank offered rate, or Libor, underpins trillions of dollars in financial products, including mortgages, some credit cards and loans to small businesses.

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But the reliance on Libor has taken a hit in recent years after an inquiry into potential manipulation of the rate led to billions of dollars in fines and shook the reputations of some of the world's biggest banks, including Barclays, Deutsche Bank, Royal Bank of Scotland and UBS.

Andrew Bailey, the chief executive of Britain's Financial Conduct Authority, said the market that Libor seeks to measure — unsecured wholesale term lending to banks — was "no longer sufficiently active" for it to continue as a benchmark. Instead, the rate was being sustained by the "expert judgment" of submitting banks.

"We do not think we will complete the journey to transaction-based benchmarks if markets continue to rely on Libor in its current form," Mr. Bailey said in a speech on Thursday at Bloomberg'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."

To set 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.

The Financial Conduct Authority would like the industry to shift to reference rates more closely tied to actual loan transactions within four to five years, rather than the current system of using the best guess of the participating submitting banks.

In his speech, Mr. Bailey cited what he called a "extreme example" in which about a dozen banks submitted a rate every day for a particular currency and maturity rate in which only 15 transactions of potentially qualifying size for that currency and maturity had been executed in 2016.

Following the Libor scandal, Intercontinental Exchange took over administration of the rate, in the hope of making it more transaction based. The administrator maintains a panel of 11 to 17 banks for each of the five currencies in which Libor is calculated: the British pound, the dollar, the euro, the Swiss franc and the Japanese yen.

Mr. Bailey said that the regulator had agreed with the panel banks to sustain Libor through 2021 in order to transition to new rates.

"This date is far enough away significantly to reduce the risks and costs of a more sudden change," Mr. Bailey said. "By having a date by which transition will need to be complete, however, we give market participants a schedule to plan to, and make it easier for them to engage as many counterparties and Libor users as is practicably possible in that planning."