WASHINGTON (Reuters) – Federal Reserve Vice Chair Randal Quarles warned on Monday that banks must accelerate efforts to detach their business rates from Libor interest rate benchmarks, going so far as to caution the “safety and soundness” of banks could come into question if still using the tarnished benchmark in 2022.
Quarles said Fed bank supervisors will be placing intense focus on banks’ efforts to transition away from Libor in 2021, and banks could be penalized if their progress is too slow. He added banks must “completely end” the use of Libor in new contracts by Dec. 31.
“After 2021, we believe that continued use of LIBOR in new contracts would create safety and soundness risks, and we will examine bank practices accordingly,” he said, according to prepared remarks.
His remarks mark the latest in an intensifying effort by global regulators to get the financial system to drop Libor, which regulators warn will no longer exist after the end of June 2023. Quarles noted in his prepared remarks that the use of Libor, which regulators moved to scrap after banks were fined billions of dollars for attempted rate-rigging, has actually gone up in recent years, rising from $200 trillion in outstanding contracts in 2018 to $223 trillion in 2021.
“That must obviously change this year,” he said in the remarks. “The firms we supervise should be aware of the intense supervisory focus we are placing on their transition, and especially on their plans to end issuance of new contracts by yearend.”
The ICE (NYSE:ICE) Benchmark Administration (IBA), which takes quotes from a panel of banks to compile different Libor “tenors” across a range of currencies, announced in November it was extending the availability of the most frequently used Libor tenors through the end of 2023.
However, Quarles noted the extension was specifically aimed at ensuring most outstanding contracts reliant on Libor would mature before the benchmark was scrapped while market participants transitioned to the Secured Overnight Financing Rate (SOFR), not at allowing banks to continue issuing more Libor-based products.
Source: Economy - investing.com
