July 18, 2012 / 3:59 PM / in 6 years

FSB chief says Libor may have to be abandoned

OTTAWA (Reuters) - The head of the global body charged with setting rules for the world financial system floated possible alternatives to the London interbank offered rate on Wednesday, and said setting the rate had proved so troubling that Libor might have to be abandoned.

Mark Carney, head of the global Financial Stability Board, said he had been talking to regulators and to other central bankers about what to do if it proved impossible to fix Libor.

“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.”

Carney, who is also governor of the Bank of Canada, said the FSB, the regulatory task force of the world’s top 20 economies, would take this up at its next meeting.

The reputation of Libor has been damaged by revelations that banks low-balled the rate to profit on trades and hide their own borrowing costs during the 2007-09 financial crisis.

“There is an attraction to moving to obviously more market-based rates if possible,” Carney said.

Carney mentioned the possibility of using repo rates and Overnight Index Swap rates, two ideas also floated by U.S. Federal Reserve Chairman Ben Bernanke in Washington. Bernanke also singled out Treasury Bill rates as a potential benchmark.

Carney, noting that different currencies might end up with different types of rate, said the Canadian Dealer Offered Rate had some attractions because it’s a committed rate.

“It’s actually a borrowing rate that is used by banks on a regular basis, almost daily basis when they take down syndicated BAs (banker acceptances),” he said.

“So we may end up, we may -- I don’t want to prescribe, it’s very early days -- but we may end up with different types of rates used in different currencies.”

Reporting by Randall Palmer; Editing by Janet Guttsman

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