U.S. Financial Regulators Push Banks to Transition Away from Libor -- 2nd Update
By Andrew Ackerman and Dave Michaels
WASHINGTON -- Top U.S. financial officials on Friday pressed
banks to stop using the London interbank offered rate on new
transactions by the end of 2021, warning that firms aren't moving
swiftly enough to replace the benchmark for hundreds of trillions
of dollars in financial contracts.
Treasury Secretary Janet Yellen and other top officials pressed
the issue at a meeting of the Financial Stability Oversight
Council, a group that monitors the stability of the financial
"We are at a key inflection point," Randal Quarles, the Fed's
point person on financial regulation, said at the meeting. "The
deniers and the laggards are engaging in magical thinking. Libor is
The exhortations amount to the strongest and clearest guidance
yet from top policy makers about the risks to banks for writing new
contracts based on Libor. The benchmark is scheduled for
replacement at the end of 2021 in the wake of a manipulation
Rather than dwindling as regulators have urged, loans tied to
Libor grew to around $223 trillion early this year compared with
$199 trillion at the end of 2016, according to a March report from
the Alternative Reference Rates Committee, a financial industry
group made up of major banks, insurers and asset managers alongside
the Federal Reserve Bank of New York.
The increase is one sign lenders have yet to fully embrace the
Fed's preferred replacement: the Secured Overnight Financing Rate,
or SOFR. While large banks and mortgage lenders like Fannie Mae
have started actively using the benchmark, some large U.S.
corporations and other borrowers held off, seeking a benchmark that
could fix rates over longer time spans.
Ms. Yellen urged bankers and other market participants to avoid
alternative rates that, she said, aren't robust enough to become a
benchmark for a multitude of other products and transactions.
"The most critical step in the transition is the move toward
truly robust alternative rates like SOFR," said Ms. Yellen, who
chairs the risk panel. "A failure to adopt robust, alternative
rates would leave us continuing to face the same risks and
challenges we face today."
Securities and Exchange Commission Chairman Gary Gensler
criticized one such alternative, the Bloomberg Short-Term Bank
Yield Index. The index's value is based primarily on trading in
commercial paper and certificates of deposit issued by 34 banks, he
The index has some of the same shortcomings as Libor, Mr.
Gensler said. There isn't enough trading behind it to support a
reliable index rate to be used to price other assets, whose value
would far exceed the trading underpinning the bank yield index, he
"When a benchmark is mismatched like that, there's a heck of an
economic incentive to manipulate it," Mr. Gensler said. "It
presents similar risks to financial stability and market
resiliency" as Libor.
A representative for Bloomberg LP didn't immediately respond to
a request for comment.
Deeply rooted in markets, Libor was marred by a 2012 scandal
that led to convictions for some traders and penalties for numerous
If the transition doesn't go as planned, consumers could end up
on the hook for increased payments on credit-card loans and other
borrowings, while small businesses could face higher fixed rates
Write to Andrew Ackerman at email@example.com and Dave
Michaels at firstname.lastname@example.org
(END) Dow Jones Newswires
June 11, 2021 16:41 ET (20:41 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.