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Given their fundamental role in the capital markets and our economy, such benchmark rates must be based on facts, not fiction. While ongoing international efforts targeting benchmarks have focused on governance principles, these efforts cannot address the central vulnerability of Libor, Euribor and similar interest rate benchmarks: the lack of transactions in the underlying market.
Given the known issues with these benchmarks, their scale and effect on market integrity, it is critical that international regulators work with market participants to promptly identify alternative interest rate benchmarks anchored in observable transactions with appropriate governance, as well as determine how to best smoothly transition to such alternatives.
Just as Canadian dollar Libor and Australian dollar Libor are being discontinued due to the lack of an underlying interbank market, US dollar, sterling, yen and euro Libor face similar underlying market challenges. The scope, as we all know, is bigger.
But it’s best that we not fall prey to accepting that Libor or any benchmark is “too big to replace". Just imagine if the quality and integrity of the drinking water across the globe had been compromised. Then, the official sector and the utilities react by addressing the problem in Australia and Canada, but not in England or the United States. They say that there are too many people relying on the current drinking water in those countries. If this were to occur, how could the public be confident in continuing to drink this water?
Gensler believes market participants and regulators around the globe do have the ability and the ingenuity to tackle the challenges of benchmark interest rates, even in the face of their scale, to restore integrity and promote financial stability.