December 18, 2019 / 4:04 PM / a month ago

Global regulator ratchets up pressure on banks and markets to ditch Libor

LONDON, Dec 18 (Reuters) - Pressure on banks and financial markets to ditch the tarnished Libor interest rate by the end of 2021 will increase next year as a global watchdog scrutinises progress in switching to new pricing benchmarks.

Libor is used to price contracts worth around $400 trillion, ranging from home loans to credit cards and swaps that are used by companies and banks to shield themselves against unexpected moves in borrowing costs.

The Financial Stability Board (FSB) said on Wednesday it will survey national regulators, many of them FSB members, to measure their progress in persuading banks and companies to stop using the London Interbank Offered Rate or Libor.

The FSB wants markets to use overnight interest rates compiled by central banks like the Federal Reserve, Bank of England and the European Central Bank.

The overnight rates are based on verifiable market transactions unlike Libor, which is largely derived from quotes submitted by banks.

"The continued reliance of global financial markets on Libor, therefore, poses risks to financial stability," the FSB said in its annual update on the Libor transition.

The FSB called for a "significant and sustained" effort by the financial sector and regulators to meet the end 2021 deadline.

"Firms need to end the use of Libor in new contracts as soon as possible," said the FSB, which coordinates financial rules for the Group of 20 Economies (G20). It will report to the G20 in July on remaining challenges to the Libor transition.

"An issue of increased concern and attention on the part of authorities is the global exposure to U.S. dollar Libor," the FSB said.

Although there is no mandatory requirements for banks to ditch Libor, members of the FSB, which include the world's main financial centres, agree to implement policies approved by the board.

There has been good progress in many derivatives and securities markets but lending markets have been slower and need to accelerate the pace of change, the FSB said.

Britain has led the way with a push to price off the Bank of England's Sonia sterling overnight rate but there are signs that even in the UK momentum could be flagging.

The BoE said on Monday that the share of futures referencing Sonia has remained at around 8% of total sterling futures volumes since July.

"The intention is that sterling Libor will cease to exist after the end of 2021. No firm should plan otherwise," the BoE said.

BoE Deputy Governor Sam Woods said on Wednesday that he will meet with banks in Britain in the first quarter of 2020 to check that regulations are not hampering their ability to transition from Libor.

Reporting by Huw Jones; Editing by Kirsten Donovan

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