Nothing Lasts Forever - Not even Libor

Libor is in the news again (still). U.K. regulators are working on plans to “improve” Libor to make it a more accurate representation of true interbank borrowing rates. At the present time, Libor is set via the honor system. Members of the British Bankers Association submit their financing rates, but there is no verification of whether or not a member bank was actually paying that rate to borrow from other banks. U.K. regulators are moving toward a system in which banks would continue to submit their rates as they do now, but could be asked to confirm those rates by presenting transaction data to regulators, so reports the Wall Street Journal. The Journal notes that Libor has infiltrated nearly every facet of our financial lives. Mortgages, credit cards and auto loans are often set off of Libor rates. The Journal opines that, because a great many financial contracts and securities are linked to Libor, it is unlikely that the Street will move to another benchmark. Although we agree that such a change would be difficult, it is not impossible. Those of you who have been in the industry long enough might remember when U.S. T-bill rates were benchmarks for loans, contracts and adjustable-rate securities. Gradually, over time, Libor supplanted T-bills as the benchmark of choice. It is not inconceivable that the industry could migrate to another benchmark (repo rate, etc.) gradually so as not to affect current securities, loans and contracts. Remember, nothing last forever.