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An interest rate that banks around the world use as a benchmark for short-term borrowing will be phased out and eventually replaced by June 2023, the Federal Reserve said on Monday.
The Fed was joined by UK regulators in announcing plans for the London Interbank Offered Rate, commonly known as LIBOR.
According to the announcement, banks are expected to stop writing contracts using LIBOR by the end of 2021, after which the rate will no longer be published.
Contracts using LIBOR are expected to end by June 30, 2023, according to the directive.
“Today’s plan ensures that the transition away from LIBOR will be orderly and fair for everyone – market players, businesses and consumers,” said Fed Governor Randal Quarles, vice president of bank oversight central, in a press release.
LIBOR is calculated as an average of banks that lend each other overnight loans. The rate is critical for the short-term funding that financial institutions use for their operations, but it has been the subject of controversy over the years, particularly the role it played in the 2008 financial crisis.
In addition to contributing to the deepening of the crisis through higher rates which made it more difficult for businesses to survive, LIBOR was at the heart of another scandal in 2012. Several banks, including some of the largest in the world , have manipulated LIBOR rates. for profit.
The Fed has warned banks to start preparing for a transition from LIBOR to what’s called the guaranteed overnight finance rate, or SOFR. Instead of relying on bank quotes, SOFR will use rates offered by investors for bank securities such as loans and bond-backed assets.
“These announcements represent critical steps in the effort to facilitate an orderly liquidation of USD LIBOR,” said New York Fed Chairman John Williams, who has been an advocate of SOFR and one of the biggest voice to urge banks to prepare for the transition to SOFR. “They provide a clear picture of the future, to help support planning for the transition over the next year and beyond.”
SOFR transactions will take place under the auspices of the New York Fed on its bond buyback market.
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