Last week the government launched a review into Libor, following the recent high profile cases, in the hope of finding a potential alternative of the rate setting process, which will reform the key interest rate benchmark which is used to help set the price of mortgages and loans.
Speaking during his press conference yesterday, Sir Mervyn King announced the importance of finding an alternative, saying: “What’s become apparent is there is no such thing as the inter bank borrowing rate. The dominant feature in setting inter bank borrowing rates is now the credit risk associated with the potential failure of a bank, and that varies from bank to bank.
“So the idea of having a panel to sort out the inter bank rate no longer makes sense.”
Sir Mervyn King added that the need to find a solution quickly is a must, adding: “Since there is an enormous stock of contracts, getting on for half a trillion dollars in assets which are derivative linked to Libor, then the question is how can you ensure that the Libor system keeps going in order to support that stock of existing contracts”
For more information, please contact Glazers, Chartered Accountants London or visit www.glazers.co.uk
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