Banks have until September this year to stop issuing cash products linked to sterling-denominated Libor as part of a fresh assault on the notorious benchmark by UK watchdogs to meet a 2021 deadline.
In a new warning to major banks and insurers published on Thursday, the Bank of England and Financial Conduct Authority said that it was demanding to see “clear evidence of engagement” from firms to make sure they move away from the scandal-tainted rate by next year.
The BoE added that it was “keeping the potential use of supervisory tools under review”, a veiled threat to firms that do not comply that senior managers may be in the line of fire and that capital ratios for banks deemed to be taking too much risk could be jacked up.
They also gave a March 2 deadline for market makers to switch the convention from Libor to another rate, Sonia, for sterling interest rate swaps.
Banks and brokers paid around $10bn in penalties around the world over the Libor-rigging scandal, and since then regulators have been keen to move to an alternative overnight rate, such as Sonia in the UK. Policymakers also view Libor as unrepresentative of behaviour in modern markets, where banks rely much less on unsecured loans to fund their activities.
But the shift is proving tricky. Libor, or the London Interbank Offered Rate, underpinned $350tn of financial products around the world, from student loans to complex derivatives.
While derivatives and fixed income markets are beginning to switch to other benchmarks, the lending and securitisation markets have barely budged. The US dollar Libor market is also further behind other jurisdictions, such as the UK.
An industry working group also published a plan of action on Thursday.
Its chair, Tushar Morzaria, who is also Barclays’ group finance director, said: “2020 will be a pivotal year in the transition journey, with critical focus on enabling the flow of new business away from sterling Libor.”
“The Working Group on Sterling Risk-Free Reference Rates has therefore defined a key priority to cease issuance of sterling Libor cash products by the end of the third quarter.”