What will replace LIBOR?

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Question

The London interbank offered rate, or LIBOR, is used by banks to help determine interest rates on loans from student loans, credit cards to commercial mortgages. The European and US banks were discovered to have manipulated LIBOR to favour their own investments. Because the LIBOR system is seen to have been tainted, it is due to be abolished and there has been much discussion on what will replace LIBOR.

In the US, a committee of Wall Street banks and regulators decide

new rates. The UK has chosen the updated Sterling Overnight Index, which is based on bank and building societies unsecured overnight funding rates. The European Central Bank is developing an unsecured overnight rate based on transaction data in banks.

Replacing LIBOR with lots of different systems could lead to confusion especially with financial organizations operating in many different countries.

LIBOR rates and the Bank of England base rate affect interest charged on loans. People who own property with a commercial mortgage are affected by any changes to how interest rates are calculated. If an existing commercial mortgage fixes their rates according to LIBOR, the mortgage contract will need to be amended when LIBOR is abolished.

Deepak Sitlani a partner at London law firm Linklaters, has proposed that a derivative-based LIBOR proxy be introduced which is described as “a risk-free rate with a credit spread added to reflect bank risk.”

The Financial Conduct Authority (FCA) wants the issue of how rates are fixed in the future to be addressed as soon as possible.

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