As its name implies, it is in the nature of the LIBOR to include a risk premium for bank credit risk.
Market stress directed at the banking sector might have repercussions on a vast array of financial products which would have been otherwise unrelated to the borrowing costs of banks. Hence the need for a risk free, or nearly risk free rate, to be used as a reference when appropriate.
On 22 July 2014, the FSB published the report “Reforming Major Interest Rate Benchmarks”, in which it advocates for:
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Strengthening existing “X”IBORs as to become transaction-based
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Developing alternative risk free, or nearly risk free reference rates
The high-level Official Sector Steering Group (OSSG) was mandated to conduct the review of the issue. A Market Participants Group was put in place, which produced a 750 page detailed report. It was recognised that the market is unlikely to move voluntarily from LIBOR to available alternatives.
The FSB report hinted that the Federal Reserve was keener to take action. In a recent article by Risk.net, Jerome Powell who is a member of the Federal Reserve System and co-chaired the OSSG, sounds determined to resolve this issue. Powell would support measures to compel a move away from the LIBOR. It would also very conveniently create the opportunity to push for US based / US supervised reference rates and put an end to the UK supremacy in this matter. UK’s reaction is likely to be lukewarm, in light of all the efforts made towards the root and branch reform of the LIBOR.
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