WASHINGTON—Top U.S. financial officials on Friday pressed banks to stop using the London interbank offered rate on new transactions by the end of 2021, warning that firms aren’t moving swiftly enough to replace the benchmark for hundreds of trillions of dollars in financial contracts.
and other top officials pressed the issue at a meeting of the Financial Stability Oversight Council, a group that monitors the stability of the financial system.
“We are at a key inflection point,”
the Fed’s point person on financial regulation, said at the meeting. “The deniers and the laggards are engaging in magical thinking. Libor is over.”
The exhortations amount to the strongest and clearest guidance yet from top policy makers about the risks to banks for writing new contracts based on Libor. The benchmark is scheduled for replacement at the end of 2021 in the wake of a manipulation scandal.
Rather than dwindling as regulators have urged, loans tied to Libor grew to around $223 trillion early this year compared with $199 trillion at the end of 2016, according to a March report from the Alternative Reference Rates Committee, a financial industry group made up of major banks, insurers and asset managers alongside the Federal Reserve Bank of New York.
The increase is one sign lenders have yet to fully embrace the Fed’s preferred replacement: the Secured Overnight Financing Rate, or SOFR. While large banks and mortgage lenders like
have started actively using the benchmark, some large U.S. corporations and other borrowers held off, seeking a benchmark that could fix rates over longer time spans.
Ms. Yellen urged bankers and other market participants to avoid alternative rates that, she said, aren’t robust enough to become a benchmark for a multitude of other products and transactions.
“The most critical step in the transition is the move toward truly robust alternative rates like SOFR,” said Ms. Yellen, who chairs the risk panel. “A failure to adopt robust, alternative rates would leave us continuing to face the same risks and challenges we face today.”
Securities and Exchange Commission Chairman
criticized one such alternative, the Bloomberg Short-Term Bank Yield Index. The index’s value is based primarily on trading in commercial paper and certificates of deposit issued by 34 banks, he said.
The index has some of the same shortcomings as Libor, Mr. Gensler said. There isn’t enough trading behind it to support a reliable index rate to be used to price other assets, whose value would far exceed the trading underpinning the bank yield index, he said.
“When a benchmark is mismatched like that, there’s a heck of an economic incentive to manipulate it,” Mr. Gensler said. “It presents similar risks to financial stability and market resiliency” as Libor.
A representative for Bloomberg LP didn’t immediately respond to a request for comment.
Deeply rooted in markets, Libor was marred by a 2012 scandal that led to convictions for some traders and penalties for numerous banks.
If the transition doesn’t go as planned, consumers could end up on the hook for increased payments on credit-card loans and other borrowings, while small businesses could face higher fixed rates for loans.
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