This scandal-hit interest rate used to set mortgages is to end in 2021

Key Points
  • London Interbank Offered Rate to be replaced by the end of 2021
  • The benchmark is used to set mortgage rates, loans, and other financial contracts
  • LIBOR at center of banking scandal which saw rates rigged by traders
Simon Dawson | Bloomberg | Getty Images

The inter-bank lending rate that has been at the heart of a price-fixing scandal is to be killed off within 4 years.

The London Interbank Offered Rate (LIBOR) is to be replaced by the end of 2021 with "a more reliable alternative" said the head of the Financial Conduct Authority (FCA), Andrew Bailey, in a speech Thursday.

Libor exploded into people's consciousness in 2012 when an investigation revealed significant fraud by member banks who helped set the daily rate of bank-to-bank borrowing.

The FCA has regulated Libor since 2013 and in his speech, Bailey said there was evidence was the benchmark is losing relevance.

"The underlying market that LIBOR seeks to measure – the market for unsecured wholesale term lending to banks – is no longer sufficiently active."

Bailey added that there seemed little prospect of the markets becoming more active in the near future and "serious questions" were in place about Libor's future.

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

Bailey added that member banks currently feel uncomfortable about submitting daily rates based on minimal borrowing activity.

The alternatives

The Financial Conduct Authority boss said panel bank support for Libor will continue until the end of 2021 before a transition to an alternative that is based firmly on market transactions.

No decision has been announced on the shape and form of the new benchmark but Bailey noted the UK's Sterling Overnight Index Average (SONIA) and a broad Treasury repo rate as two benchmarks that held the advantage of being anchored in significantly active markets.

"Neither involves expert judgment. In both cases, issues about fairness with regard to who or who is not on the panels, fall away, as transaction data are collected from relevant market participants by the relevant central banks," said Bailey.

The British banker also cited the euro's overnight rate (EONIA), Swiss SARON and Japan's TONAR as benchmarks that took rates from overnight transactions.

Leon Neal | AFP | Getty Images

A multi-billion scandal

Libor is a daily rate set at 11:45 a.m. London time after several banks submit a price at what they believed they could borrow money from other banks at. The rate is then finalized as an average of the various submissions.

The result is then used as a benchmark for the price of mortgages, loans, and other financial transactions.

Libor hit the front pages when it emerged that banks were submitting false daily data in order to portray a false picture of their health.

Big banks have so far been fined a reported $9 billion to date for their role in fixing the rates. The only high profile conviction so far is Tom Hayes, a former UBS and Citigroup trader, who was sentenced to 14 years in jail in 2015.