Scrapping LIBOR Too Soon Would Spur Market Chaos
The Federal Reserve warns of market risk in its response to a lawsuit by consumer borrowers and credit card users who are seeking an injunction to end LIBOR.
The Federal Reserve told a judge not to scrap LIBOR—the London interbank offered rate—as requested by consumers in a lawsuit, because it would pose a risk to financial stability and undermine years of global planning for a transition to a new benchmark for borrowing rates.
A staged transition away from LIBOR is underway globally, but immediately ending the rate by court order would likely harm consumers and businesses, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York said in a filing Friday in federal court in San Francisco.
Dozens of consumer borrowers and credit card users are seeking an injunction to end LIBOR, claiming the benchmark is the work of a “price-fixing cartel.” The plaintiffs are also seeking monetary damages.
But ending the benchmark now would likely disrupt the trading of financial contracts, up-end consumer contracts like mortgages and student loans, and create “an avalanche of litigation,” the Fed said in its filing. The central bank said about $223 trillion of financial products are tied to the U.S. dollar LIBOR rate.
See also:
- How to Prepare for the End of LIBOR
- LIBOR’s Final Days Begin with Shakeup to Swaps Market
- U.S. Leveraged Loans May Ditch LIBOR Within Weeks
- Derivatives Have a LIBOR Solution
- LIBOR Replacements Can Be Substituted into Existing Contracts
“Without an orderly transition away from LIBOR, there would undoubtedly be confusion and uncertainty in all markets that currently rely on LIBOR on a day-to-day basis,” the Fed said in the filing.
LIBOR is derived from a daily survey of bankers who estimate how much they would charge one another to borrow. In the wake of the 2008 financial crisis, regulators discovered that lenders had been manipulating the rates to their advantage, resulting in billions of dollars of fines.
Regulators and market participants around the world are currently in the process of shifting to new benchmarks to replace the scandal-plagued suite of LIBOR rates. In the United States, new contracts tied to dollar LIBOR are supposed to end this year, and the final settings should be phased out by mid-2023, according to current timetables.
The threat of an abrupt end to LIBOR has also drawn vigorous defenses from some of the world’s biggest banks. The Fed’s filing echoed claims made in November by defendants including JPMorgan Chase & Co., Credit Suisse Group AG, and Deutsche Bank AG, which argued that abruptly ending LIBOR would wreak havoc on financial markets.
In June, the judge overseeing the case refused to move the suit from San Francisco to New York, rejecting an argument by big banks that the case belongs in Manhattan due to the decades of litigation there over the benchmark and court decisions it has produced.
—With assistance from William Shaw and Benjamin Purvis.
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