This column argues that strengthening governance and/or adopting a trade-weighted reference rate is probably the fastest approach, but not necessarily sufficient for a resilient reference rate in the long run.
Authors: Vincent Brousseau (ECB), Alexandre Chailloux (IMF), Alain Durré (ECB)
Conclusion
The Libor scandal that emerged in May 2012 demands appropriate answers. This necessarily involves finding a successor which can be used in a reliable manner in all circumstances and thus not lead to controversy amid reduced market activity. With the benefit of hindsight, the recent crisis showed that the overnight index swap market continued to work, while banks continued to make secured short-term transactions. Therefore, the authors believe that a migration to the overnight index swap indices is possible. At the same time, establishing a more ambitious benchmark like the total cash pool index would be useful in order to have a precise view of banks’ funding costs.
Of course, the latter option – however desirable – could not be implemented overnight. But the legacy aspect of the debate should not undermine the chances of a successful and rapid transition towards an effective solution. This apparent difficulty must not prevent policymakers from addressing this possibility in an open manner to increase transparency in the financial industry. A serious discussion on the options at hand is more necessary than ever, but we should recognise that the success of the new candidate will also depend on its adoption (or not) by the financial industry.
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