March 29, 2019 / 2:11 PM / 6 months ago

Banks should quickly adopt LIBOR alternatives: Swiss expert

ZURICH (Reuters) - Banks should adopt alternative reference interest rates swiftly ahead of the expected end of Libor in 2021, said a Swiss expert and member of a panel developing the country’s alternative rate for new corporate and private loans.

Switzerland, the United States, the euro zone, Britain and Japan need to replace the dominant Libor money market rate, which is being phased out after a series of scandals that led to banks being fined billions of dollars.

Switzerland is now putting the finishing touches on its transition to the Swiss Average Rate Overnight (SARON).

At a meeting in Zurich on Friday, SARON task force co-chair Martin Bardenhewer said banks should not delay in making the switch from Libor.

“It is a better strategy to transition voluntarily, which means a transition before the end of 2021, and not to wait for a ‘Big Bang’ transition which might have some additional risks,” he said.

In 2017, about 6 trillion Swiss francs ($6 trillion)of contracts used the London Interbank Offered Rate (Libor) as a benchmark, making it by far the most important interest rate for the Swiss economy.

Libor rates spiked in September 2008 after the collapse of Lehman Brothers, and three years later discount brokerage Charles Schwab filed lawsuits alleging 11 major banks conspired to manipulate the benchmark rate by reporting inflated or deflated rates from which Libor was calculated each day.

Unlike Libor, SARON is not calculated from contributions by individual banks but based on actual market prices, to be determined via a platform on the Swiss stock exchange serving banks and insurers. The aim is to make it tamper-proof.

Although the Libor might continue beyond 2021, Bardenhewer said, it would no longer represent a reference rate. The uncertainty over when and whether Libor will end could lead to legal problems in contracts.

“Therefore, there are very strong incentives to transition before,” Bardenhewer said.

Reporting by Angelika Gruber, writing by John Miller; Editing by Hugh Lawson

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