banking

5 steps to improve the financial system

Replace Libor with new rate
Replace Libor with new rate © Sergey Nivens/Shutterstock.com

For more than a quarter century, the British Bankers' Association has collected borrowing costs from the world's largest banks and released daily an adjusted average of the rate that banks pay to take loans from each other. The London Interbank Offered Rate, or Libor, is the global benchmark for trillions in loans, derivatives and other financial contracts.

That was until the Libor manipulation scandal. In the wake of the 2008 financial crisis, regulators discovered that not only were banks reporting false borrowing costs, some were manipulating the rates in collusion with their trading colleagues at a profit. They have fined UBS, Barclays and the Royal Bank of Scotland a total of $2.5 billion. A dozen firms are still under investigation.

Some regulators and banking experts now want to replace Libor, which relies on self-reported interbank rates, with some interest rate index based on actual transactions and market activity that's much harder to manipulate. Not only do regulators need to decide on what rate to use, they must decide how to shift the world's financial markets to the new reference rate.

"The council recommends that U.S. regulators cooperate with foreign regulators, international bodies and market participants to promptly identify alternative interest rate benchmarks that are anchored in observable transactions and are supported by appropriate governance structures," Lew told Congress.

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