pixabay
Andrew Bailey, head of the Financial Conduct Authority (FCA), which regulates LIBOR, said that the benchmark is not reliable due to a lack of transactions to provide data.
Each business day, LIBOR is calculated by the British Banking Association 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.
LIBOR rates shape financial contracts for more than $ 350 trillion. The benchmark’s reliability was questioned because of a series of scandals. As previously reported, traders of a number of banks manipulated the rate, providing false data. Banks were fined for a total of about $ 9 billion, and several traders were sent to prison.
According to Bailey, the market that supports LIBOR, where banks provide unsecured loans to each other, is already "not sufficiently active" to determine a reliable rate, and it is necessary to find alternatives. In one case, banks that set the LIBOR rate for one of the benchmark versions made only 15 transactions in this currency during the entire 2016, noted the FCA’s head.
"The lack of active markets raises a serious question about the sustainability of LIBOR benchmarks," said Bailey, who is widely regarded as the next candidate to head the Bank of England. "If the active market does not exist, how can even the best benchmark measure it?"
The head of the Bank of England, Mark Carney, said earlier this month that LIBOR can no longer exist in its present form. The LIBOR alternative has not been selected yet. Theoretically, it can be replaced by the Sterling Over Night Index Average (SONIA), which is calculated on the basis of data on the rates of overnight bank loans in pounds sterling.
source: bloomberg.com
Each business day, LIBOR is calculated by the British Banking Association 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.
LIBOR rates shape financial contracts for more than $ 350 trillion. The benchmark’s reliability was questioned because of a series of scandals. As previously reported, traders of a number of banks manipulated the rate, providing false data. Banks were fined for a total of about $ 9 billion, and several traders were sent to prison.
According to Bailey, the market that supports LIBOR, where banks provide unsecured loans to each other, is already "not sufficiently active" to determine a reliable rate, and it is necessary to find alternatives. In one case, banks that set the LIBOR rate for one of the benchmark versions made only 15 transactions in this currency during the entire 2016, noted the FCA’s head.
"The lack of active markets raises a serious question about the sustainability of LIBOR benchmarks," said Bailey, who is widely regarded as the next candidate to head the Bank of England. "If the active market does not exist, how can even the best benchmark measure it?"
The head of the Bank of England, Mark Carney, said earlier this month that LIBOR can no longer exist in its present form. The LIBOR alternative has not been selected yet. Theoretically, it can be replaced by the Sterling Over Night Index Average (SONIA), which is calculated on the basis of data on the rates of overnight bank loans in pounds sterling.
source: bloomberg.com
