LONDON (Reuters) - The Libor system as a measure of interbank lending costs has ceased to work since the financial crisis and a fix needs to be found to support existing contracts based on the rate, Bank of England governor Mervyn King said on Wednesday.
Britain has set out to reform the key interest rate that was rigged by a number of banks, including Barclays (BARC.L), in a transatlantic scandal that is threatening to seriously damage London’s reputation as a financial center.
The scandal has sparked a blame game among market watchdogs in the United States and Britain who are now calling for direct regulation of the benchmark, which is currently compiled and overseen by the banking industry.
A single interbank borrowing rate had ceased to exist since the financial crisis as banks were now assessed according to their individual credit risks, King said during a news conference presenting the central bank’s latest forecasts.
“So the idea of having a panel to sort out what is the interbank lending rate no longer makes any sense,” he said.
A British government review launched last week is looking at the potential for alternative rate-setting processes and how to move to a new regime, which may take some time as many long-term contracts are pegged to Libor, the London interbank offered rate.
King also highlighted the need to find a bridging solution.
“Since there is an enormous stock of contracts, getting on for half a trillion dollars in assets which are derivative linked to Libor, then the question is how can you ensure that the Libor system keeps going in order to support that stock of existing contracts,” he said.
Thomson Reuters (TRI.TO), parent company of Reuters, has been calculating and distributing the rates for the British Bankers Association since 2005, when it acquired previous calculating agent Telerate.
Reporting by Sven Egenter; Editing by Catherine Evans