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Budget 2021

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Moneycontrol

Budget 2021

Associate Partners:

  • SMCSamsungVolvo
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Markets threatened with instability if Libor is abolished: Global banks

The plaintiffs have said they want Libor to be either prohibited or set at zero with borrowers repaying capital but not interest. However, according to attorneys with banks, regulators have warned that even a small hindrance to Libor could devastate financial markets.

January 13, 2021 / 03:40 PM IST

A couple of the world's biggest banks are urging a US judge not to immediately terminate Libor.  This follows a suit by a group of borrowers claiming the benchmark was the work of a “price-fixing cartel."

The defendants, in this case, include JPMorgan Chase & Co., Credit Suisse Group AG, and Deutsche Bank AG. In a November filing, they said that an injunction which sharply ended the London interbank offered rate would wreak havoc on financial markets, Bloomberg reported.

The plaintiffs, includes 27 consumer borrowers and credit card users, are also seeking monetary damages.

While attorneys not involved in the case continue to say that the chances of an injunction are slim, it underscores the risks and legal costs for banks that continue to prop up services like Libor.

It also exposes the fragility of a discredited benchmark which could be halted by a single court, theoretically.

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What is Libor? 

Libor is derived from a daily survey of bankers who estimate how much they would charge each other to borrow. It essentially allows you to determine the cost of borrowing around the world, from student loans and mortgages to interest-rate swaps and collateralized loan obligations.

What would happen if Libor is turned off? 

Hundreds of billions of dollars of bonds, loans, and securitisations lack a clear replacement rate. This could cause risk to financial stability as they would be unable to transition to an alternative rate, unlike derivative contracts.

According to the report, the plaintiffs have said they want Libor to be either prohibited or set at zero with borrowers repaying capital but not interest.

However, according to attorneys with banks,  regulators have warned that even a small hindrance to Libor could devastate financial markets.
Moneycontrol News
first published: Jan 13, 2021 03:40 pm

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