Chris Sampson via flickr
The minutes of the June meeting of the Bank of England's Financial Policy Committee (FPC) underscore fears that many new financial contracts are issued on the basis of this rate, despite the fact that it is planned to abandon it in three years’ time.
According to the Bank of England, financial contracts for more than 30 trillion pounds sterling are linked to LIBOR. These contracts include interest rate swaps, interest rate futures, cross-currency swaps, syndicated loans, and floating rate bonds.
"As long as the volume of LIBOR-related derivatives in pounds sterling continues to increase, medium-term risks for financial stability will grow," warned the regulator.
LIBOR is calculated by the British Banking Association on a working day basis based on data provided by the largest British banks on their estimated borrowing costs. The LIBOR rate is calculated for five currencies: the US dollar, the pound sterling, the Swiss franc, the Japanese yen and the euro.
The reliability of the benchmark was questioned because of a series of scandals. It turned out that traders of a number of banks manipulated the rate by providing false data.
Earlier it was reported that Britain will stop using LIBOR by the end of 2021, as regulators and banks want to replace this rate with a more reliable one.
Bank of England and major dealers in the UK supported the rate of SONIA (Sterling Overnight Index Average) as the preferred "almost risk-free" benchmark.
"Over time, the private sector will develop a wider range of products related to SONIA," said the head of the Bank of England, Carney, "The end point should be an ecosystem for interest rate markets that have a healthier basis than at present".
source: telegraph.co.uk
According to the Bank of England, financial contracts for more than 30 trillion pounds sterling are linked to LIBOR. These contracts include interest rate swaps, interest rate futures, cross-currency swaps, syndicated loans, and floating rate bonds.
"As long as the volume of LIBOR-related derivatives in pounds sterling continues to increase, medium-term risks for financial stability will grow," warned the regulator.
LIBOR is calculated by the British Banking Association on a working day basis based on data provided by the largest British banks on their estimated borrowing costs. The LIBOR rate is calculated for five currencies: the US dollar, the pound sterling, the Swiss franc, the Japanese yen and the euro.
The reliability of the benchmark was questioned because of a series of scandals. It turned out that traders of a number of banks manipulated the rate by providing false data.
Earlier it was reported that Britain will stop using LIBOR by the end of 2021, as regulators and banks want to replace this rate with a more reliable one.
Bank of England and major dealers in the UK supported the rate of SONIA (Sterling Overnight Index Average) as the preferred "almost risk-free" benchmark.
"Over time, the private sector will develop a wider range of products related to SONIA," said the head of the Bank of England, Carney, "The end point should be an ecosystem for interest rate markets that have a healthier basis than at present".
source: telegraph.co.uk
