| WASHINGTON, Sept 4
WASHINGTON, Sept 4 The U.S. Federal Reserve will
accelerate its search for a substitute to the Libor benchmark
interest rate to stave off what would be "a horrible mess" if
the current system collapses with no alternative, Fed Governor
Jerome Powell said on Thursday.
The unsecured interbank lending market on which Libor - the
London interbank offered rate - is based "has been in a secular
decline," making it difficult for banks to credibly set the
benchmark lending rate that has been wired into an estimated
$150 trillion in dollar-based contracts worldwide, Powell said
in remarks prepared for delivery at a New York University
"Is it wise to rely on a critical benchmark that is built on
a market in decline? Clearly not," said Powell, the Fed's
representative on an international panel charged with revising
the system of reference rates used in financial contracts. If
the daily estimate of Libor "were to become untenable, or if we
were to simply 'end Libor,' ... untangling the $150 trillion in
outstanding U.S. dollar Libor contracts would entail a
protracted, expensive and uncertain process."
Along with the large number of dollar-based contracts, Libor
is used as a reference rate for another $150 trillion in
contracts denominated in other currencies and is also common in
financial derivatives. It is a critical tool in the global
financial system, used to set the terms of consumer loans, home
mortgages, corporate bonds and other widely used forms of
But confidence was shaken when it was disclosed that the
banks whose daily rate estimates are used to set Libor had been
manipulating the process for years. More than $6 billion in
fines were levied as a result of the scandal.
The process for setting the rate has since been revised. But
Powell said it is still critical to find an alternative that is
based on transactions in credit markets that are large and
robust enough to reflect actual lending conditions - such as the
U.S. Treasury market.
He said Libor was not designed to play the widespread role
it has taken on and was "perhaps too important" to global
He said the U.S. central bank would meet with the largest
financial firms and others over the course of the rest of the
year to develop an alternative reference rate. "We are strongly
committed that at least one such rate be developed and actively
used as soon as possible," he said.
Powell said Libor itself should be strengthened so that it
can continue to be used, perhaps by basing it on actual
transactions among a larger group of institutions, instead of
the current method of basing it on banks' estimates of what they
would be charged for borrowing from other banks.
(Reporting by Howard Schneider; Editing by Leslie Adler)