In the world of finance, there is one number that arguably matters more than any other. You can find it in the small print on adjustable-rate mortgages and private student loans, it is the basis for enormous corporate loans, and it underpins nearly $200 trillion of derivatives contracts.
But it is on the way out, and Wall Street has not worked out how to replace it.
The number in question is called Libor, which is short for the London interbank offered rate. Published daily, Libor is an interest rate benchmark, or the basis for many other interest rates. If you have heard of it, that might be because it was at the center of a market-manipulation scandal that resulted in jail time for some traders and billions of dollars in fines for many banks.
Read more from The New York Times:
There are other important financial benchmarks, of course — the Federal Reserve’s fed funds rate and the yield on the 10-year Treasury note among them — but Libor has emerged over time as the dominant rate for determining interest payments on almost all adjustable-rate financial products.
Now, regulators are stressing that the benchmark could be gone by 2021.
What will replace it? Nobody knows for sure.
As traders speculate about what will happen to financial markets when Libor disappears, regulators appear to be worried that banks are not taking the coming change seriously enough. To move away from Libor requires vast amounts of work, and given how tightly woven it is into the financial fabric, it isn’t the kind of thing anyone wants to see rushed.
“I hope it is already clear that the discontinuation of Libor should not be considered a remote probability,” Andrew Bailey, chief executive of Britain’s Financial Conduct Authority, said in a speech last week.
Warning against “misplaced confidence in Libor’s survival,” Mr. Bailey said that the number of financial contracts with interest rates derived from the benchmark continued to grow. Regulators in the United States, including the chairman of the Commodity Futures Trading Commission, have raised similar warnings.
On Thursday, a meeting that is scheduled at the Federal Reserve Bank of New York will focus on preparing for a world without Libor: A panel is expected to address crucial details, including the best ideas for language that should be used to replace Libor in contracts for financial products like business loans, derivatives and floating-rate notes.
Here’s what’s at stake.