Regulators on both sides of the Atlantic have spent the better part of three years trying to kill the
London interbank offered rate. Now, they’re looking to it once again to underpin hundreds of billions of dollars in loans as they seek to rescue their economies.
U.S. policy makers last week changed tack and turned to Libor as the benchmark for their $600 billion Main Street Lending Program, which will buy debt from potentially hundreds of companies. The move came a day after U.K. officials granted banks a six-month extension to keep issuing loans tied to the beleaguered reference rate, which is supposed to be phased out by the end of 2021.
The timetable to do away with the benchmark linked to trillions of dollars of financial assets appears increasingly at risk as central bankers lean on Libor to help expedite their massive stimulus efforts. As they lend legitimacy to the much-maligned rate, some market watchers say it’s highlighting the shortcomings of replacements, while others note it could ultimately lead to a more difficult transition down the road.
“The crisis does make it tougher and it will put a lot more time pressure on meeting the deadline,” said Darrell Duffie, a finance professor at Stanford University who has written extensively on Libor. He called the Fed’s decision, while necessary, “very unfortunate” and a missed opportunity to pivot
away from the benchmark, adding that it’s a sign that U.S. lenders “were not getting ready” for the transition.
When I originally took regulatory exams back in 2003 there were quite a few areas of the financials markets in London that relied on gentleman’s agreements for regulation. Mergers & acquisitions, the law society, the gold and silver market and most of all LIBOR were all self-regulated markets. One of the biggest changes that followed the credit crisis was to try and exert greater control over the organs of the financial system.Click HERE to subscribe to Fuller Treacy Money Back to top