Interest rates used to price financial contracts worth trillions of dollars globally should in future be based on actual market transactions and not banks’ judgments, Bank of England Governor Mark Carney said in minutes of a meeting released on Monday.
The pricing of financial contracts based on the London Interbank Offered Rate (Libor) led the BoE and other central banks to look at alternatives based on actual market transactions to make them harder to manipulate.
Libor is based on submissions from banks of interest rates they believe they would be charged by other banks for borrowing money.
Banks were fined billions of dollars for trying to rig Libor and its continental European counterpart, Euribor.
Libor had been compiled by a UK banking industry body, which was stripped of this role. The benchmark is now run by an independent firm regulated by the Financial Conduct Authority, but Carney’s comments signal that such reforms won’t be enough.
He told industry representatives attending the BoE’s Roundtable on Sterling Risk-Free Reference Rates on July 6 that controls on Libor rate submissions from banks were now much tighter.
But, according to the minutes, Carney said a situation where “a judgment-based benchmark underpinned an estimated $350 trillion-worth of contracts was not desirable.”