18/05/2018 2 articles telegraph.co.uk  3 min 🇬🇧 #141439

Smooth transition from scandal-hit Libor in 2021 'highly unlikely', banks warned

Top regulator Andrew Bailey wants banks to support Libor until 2021, when he expects to have a better alternative in place 

Banks need to start preparing for the death of Libor in 2021 or a smooth transition away from the scandal-hit benchmark will be "highly unlikely" and pose considerable risks, a consultancy has warned.

Libor, or the London interbank offered rate, is used to price $240 trillion (£170 trillion) worth of financial products globally but is being slowly phased out as regulators transition  to an alternative. All twenty banks which submit quotes for Libor, including HSBC, Credit Suisse, JP Morgan and Lloyds, have  promised to support the rate until then.

While that pledge has soothed concerns that Libor could suddenly vanish before 2021, consultants Oliver Wyman have warned banks that they face "major risks and administrative burdens" if they don't start preparing for the changes immediately.

In a report published on Tuesday, the firm said a wait-and-see approach to the process would be "unwise" for banks with large Libor-linked exposures given the hundreds of thousands of contracts and multiple business lines that will be impacted in just a few years.

"Libor is a cornerstone of the financial industry today, and a transition away from it would impact a vast array of products, businesses, systems and processes, as well as customers and counterparties. The potential for negative public response, conduct risk, and litigation is very real," said Serge Gwynne, a co-author of the report along with Adam Schneider.

Big banks will need to communicate a clear transition approach to large corporations and other financial institutions as well as their millions of retail customers, the report said, adding that firms should be engaging with regulators to help shape the process.

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Oliver Wyman said the alternative reference rates being proposed are "structurally different both to Libor and to each other" which made the likelihood of a seamless transition highly unlikely.

"While the discontinuation of Libor may seem far away, the magnitude of the transition and potential for financial impact means financial institutions must start mobilizing near term," Mr Schneider added.

Libor was tainted after manipulation of the rate was uncovered in 2012, when traders at some of the world's biggest banks were accused of fixing the rate for their own benefit.

 telegraph.co.uk

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