Central bankers to look at scrapping Libor
The rate fixing scandal engulfing Barclays bank may have irreparably damaged the benchmark rate
By CFOWorld staff | CFO UK | Published 10:09, 19 July 12
Officials are looking at whether to scrap the key inter-banking lending rate given the damage the rate fixing scandal has done to the global benchmark rate.
Central bankers and regulators are due to hold talks in September on whether Libor can be reformed or whether it is has been irreparably damaged and should be ditched.
Bank of England governor Mervyn King told fellow central bankers in a letter that it was "very clear that radical reforms of the Libor system are needed".
US Federal Reserve chairman Ben Bernanke and global financial regulator Mark Carney, who is also governor of the Bank of Canada, on Wednesday floated possible alternatives to the London Interbank Offered rate, which some bankers manipulated in the 2007-09 financial crisis.
"There are different alternatives if Libor cannot be fixed," Carney told a news conference in Ottawa.
"If it's structurally flawed and can't be fixed -- which is a possibility -- there may need to be different types of approaches, and we need to think that through."
The concerns over Libor prompted scrutiny of lending benchmarks elsewhere. The European Central Bank is putting pressure on the organisers of Euribor to shore up faith in the euro benchmark, sources familiar with the matter told Reuters.
Singapore, Hong Kong and Japan announced reviews of the way interbank benchmark rates were set in the Asian financial centres, while in South Korea the anti-trust agency widened a probe into possible rate-fixing.
The BoE governor King put the Libor issue on the agenda of the Economic Consultative Committee of global central bankers that will meet in Basel, Switzerland, on 9 September, a central bank source said.
The discussions will continue there the following week at the Financial Stability Board's steering committee, which is chaired by Carney and which also includes financial regulators.
"There is an attraction to moving to obviously more market-based rates if possible," Carney said in his news conference.
Libor is used for $550 trillion of interest rate derivatives contracts and influences a wide array of financial products from mortgages to credit cards, and Carney said it was crucial that markets be able to have "absolute confidence" in it.
So far the scandal has seen three senior executives at Barclays bank resign including chief executive Bob Diamond after US and UK authorities fined the bank £290 million for manipulating the rate. Investigators are looking at the role of other banks in the scandal too
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