Belfast Telegraph

Libor will not be around forever and banks need to think about alternative - FCA

The UK's financial watchdog has cast doubt over the future of Libor and urged banks to shift towards alternative reference rates within the next four to five years.

The Financial Conduct Authority (FCA) said it would no longer force banks to submit to Libor from 2021 after a dearth of financial transactions providing data called into question the rate's relevance.

The London Interbank Offered Rate - or Libor - has been steeped in financial scandal, but remains crucial for calculating the interest rates on household mortgages or loans for some big businesses.

The move comes after Bank of England governor Mark Carney proposed scrapping Libor last week in favour of a widespread adoption of the Sterling Overnight Index Average (Sonia).

In a speech at Bloomberg's offices in London, FCA chief executive Andrew Bailey said the underlying market that Libor measures is "no longer sufficiently active".

He said: "The absence of active underlying markets raises a serious question about the sustainability of the Libor benchmarks that are based upon these markets.

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

He added: "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.

"Work must therefore begin in earnest on planning transition to alternative reference rates that are based firmly on transactions."

Libor is the rate at which banks borrow from each other and is often seen as a gauge of a lender's financial health.

However, 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 Bailey added: "What I will say this morning does question the sustainability of Libor in its current form, but this is not because we suspect further wrongdoing or have any evidence of such."

The FCA began questioning 49 banks last month in order to gauge which were the most active in the unsecured wholesale bank borrowing and related markets.

Focusing on how banks may transfer to a different rate, he said: "In the context of that requirement to have contingency plans for the scenario in which current Libor could no longer be produced, we have discussed with industry participants models such as calculation of a one-off set of term credit spreads, which could be added to the dynamic base of the risk free rates, such as reformed Sonia.

"That sort of model, and the thinking underlying it, may be useful also for those looking to organise a transition from current Libor to an alternative reference rate."