An international financial benchmark used to set interest rates on many mortgages, car loans, futures market trading and other transactions "is unsustainable," a top U.S. market regulator said Thursday.
Known as Libor — an acronym for London Interbank Offered Rate — the financial benchmark represents the rate at which global banks operating in London say they would be able to obtain unsecured loans from each other for periods ranging from a few months to one year.
But the Libor system has come under embarrassing global scrutiny after evidence emerged that financial traders and supervisors regularly rigged the rate, a finding that raises the possibility some mortgage and loan rates could be improperly high or low.
Three banks, England-based Barclays, Swiss giant UBS and Royal Bank of Scotland, collectively have been fined more than $2.5 billion in enforcement actions. Several other banks, including U.S.-based Citigroup, JPMorgan Chase and Bank of America, have said they are cooperating with investigators' requests for Libor-related records.
Besides the growing scandal, Gary Gensler, chairman of the Commodity Futures Trading Commission, told a financial markets conference in New York that the integrity of the Libor system has also been undermined by shifts away from the practice of banks lending unsecured funds to each other.
As a result, "I believe that continuing to reference such rates diminishes market integrity and is unsustainable in the long run," Gensler told the Global Financial Markets Association.
Financial market participants and operators are considering potential Libor replacements based on real transactions. These include overnight index swaps rates, benchmark rates based on actual short-term collateralized financings or a new standard based on government borrowing rates, Gensler said.
While any decision to phase out the Libor system could be unpopular, no financial benchmark should be "too big to replace," he said.
"I believe the best way to promote both market integrity and long-term stability is by ensuring that benchmarks are reliable and honest," said Gensler. "I recognize that change can be hard, but change is also a natural part of life."
Source: http://www.usatoday.com/story/money/business/2013/02/28/gensler-criticizes-libor-system/1953441/
But the Libor system has come under embarrassing global scrutiny after evidence emerged that financial traders and supervisors regularly rigged the rate, a finding that raises the possibility some mortgage and loan rates could be improperly high or low.
Three banks, England-based Barclays, Swiss giant UBS and Royal Bank of Scotland, collectively have been fined more than $2.5 billion in enforcement actions. Several other banks, including U.S.-based Citigroup, JPMorgan Chase and Bank of America, have said they are cooperating with investigators' requests for Libor-related records.
Besides the growing scandal, Gary Gensler, chairman of the Commodity Futures Trading Commission, told a financial markets conference in New York that the integrity of the Libor system has also been undermined by shifts away from the practice of banks lending unsecured funds to each other.
As a result, "I believe that continuing to reference such rates diminishes market integrity and is unsustainable in the long run," Gensler told the Global Financial Markets Association.
Financial market participants and operators are considering potential Libor replacements based on real transactions. These include overnight index swaps rates, benchmark rates based on actual short-term collateralized financings or a new standard based on government borrowing rates, Gensler said.
While any decision to phase out the Libor system could be unpopular, no financial benchmark should be "too big to replace," he said.
"I believe the best way to promote both market integrity and long-term stability is by ensuring that benchmarks are reliable and honest," said Gensler. "I recognize that change can be hard, but change is also a natural part of life."
Source: http://www.usatoday.com/story/money/business/2013/02/28/gensler-criticizes-libor-system/1953441/
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