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The very existence of the London Interbank Offered Rate (Libor) has been threatened by the escalating scandal involving banks allegedly manipulating the rate during the credit crisis.
The credibility of the benchmark, which has been in place for nearly three decades, and affects everything from the survival of the world’s biggest banks to interest rates for ordinary savers, has been dented. Ben Bernanke , US Federal Reserve chairman, told Congress Tuesday that it is “structurally flawed.” International efforts to reform the benchmark rate are underway.
The revelations about artificial lowering of the rate, which helped mislead markets about banks’ willingness to lend to each other, have already claimed the job of ex-Barclays Chief Executive Bob Diamond. More scalps are likely to follow as the investigation continues.
So, will Libor itself be killed off? Or can it survive in a different form? ( Click here for an explanation of how Libor works. )
Totally eliminating the rate, which is used to set rates for an estimated $800 trillion of derivatives and debt, sends shivers down spines in London and Wall Street.
“The size of the markets which reference Libor is so large that to abandon or radically alter it would cause unpredictable consequences,” Laurence Mutkin, European interest rate strategist at Morgan Stanley, pointed out.
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