Bank of England Governor backs replacing rigging-hit Libor rate
Bank of England Governor Mark Carney has proposed scrapping the scandal-ridden Libor rate as a benchmark for interbank lending, with hopes of replacing it with a relatively "risk free" alternative.
The Governor is gunning for the widespread adoption of the Sterling Overnight Index Average (SONIA) in hopes of weaning the system off Libor - a benchmark that Mr Carney said suffered from structural weakness due to its continued reliance on human judgment.
"Although controls around Libor submissions had become much tighter since 2012, a situation in which a judgment-based benchmark underpinned an estimated 350 trillion US dollars-worth of contracts was not desirable," Mr Carney noted, according to minutes from a London round table on July 6.
Libor - the London Interbank Offered Rate - is the rate at which banks lend to each other, and is used to set millions of pounds worth of financial deals including car loans and mortgages.
It is also used in complex overseas financial transactions.
But a spate of Libor-rigging scandals - some dating back to 2005 - brought the benchmark into the public spotlight in the wake of the 2008 global financial crisis, resulting in fines for international banks and convictions for City traders.
Mr Carney said the shift towards SONIA, which was characterised as a "robust, fully transaction-based" reference rate, was necessary and would happen over time, but would require broad support from benchmark users.
His comments were followed by a speech from Chris Salmon, the Bank's executive director of markets, who said the transition would ultimately lead to greater security.
Mr Salmon said: "Over time, we need to see a broad transition away from sterling Libor towards SONIA. That will require changes in the behaviour of firms that carry some cost.
"But, where SONIA better matches the risks firms are hedging, there will be long-term benefits. Moreover the financial system will be safer."