Bank of England Governor Andrew Bailey said that markets must not replace the tarnished Libor interest rate with alternatives that could end up replicating the same flaws that made it easy for banks to manipulate.
The publication of some dollar denominations will continue until mid-2023 for outstanding contracts. But still the London Interbank Offered Rate is being scrapped. This is to be done at the end of December. In an online event Bailey told, that he is pleased that they have made a lot of progress and also, he is very optimistic that they will be there.
Regulators want Libor replaced with overnight “risk-free” rates compiled by central banks, such as Sonia at the Bank of England and Sofr at the Federal Reserve. Some U.S. banks have called for an alternative rate added to Sofr. This is to reflect the credit risk of a counterparty to a loan. And then some are already being offered in the U.S. market.
Bailey said that while these rates may offer convenience as a short-term substitution, they present a range of complex longer-term risks. And also added that the ability of such rates to maintain representativeness through periods of stress remains a challenge to which they have not seen adequate answers. He even said that in the UK there is a clear consensus that credit sensitive rates are not required or wanted as part of sterling Libor transition and in his view this is sensible.
It was not clear to what extent alternative credit sensitive benchmarks have truly addressed the weaknesses of Libor. John Williams, president of the New York Federal Reserve Bank, said that the vast majority of transactions currently in Libor really are in the derivatives, in broader markets, where the overnight risk-free rate is the best and also most appropriate. But also, can build this really strong foundation due to the breadth and depth of those underlying markets. He also stated that credit-sensitive alternatives might only be appropriate for a limited set of loans.
