Libor
A senior U.S. Treasury official on Thursday urged borrowers to move away from Libor, the benchmark interest rate at the heart of a multibillion-dollar manipulation scandal in recent years.
Libor, or the London interbank offered rate, is a rate based on what big banks charge each other for overnight loans.
It doesn't make sense for non-bank borrowers to face increased costs because of stress in the banking sector, Daleep Singh , acting assistant secretary for financial markets, said at an industry conference in Chicago .
"If you are borrowing money in an adjustable rate mortgage loan, does it make sense to you that your interest rate will go up if the market starts to view a handful of banks as less creditworthy on average?" he said in a speech.
"Gloomier yet, are you prepared for your rate to increase in an environment of broadly elevated stress?" he added.
The comments by Mr. Singh come after an industry group tasked by the Federal Reserve with finding an alternative to Libor narrowed its focus to two reference rates in May.
Corporations and pension funds that use interest rate swaps to hedge against fluctuations in rates should also reconsider their use of Libor-linked contracts, Mr. Singh said.
The Treasury official said it would be "difficult and complex" to switch away from Libor, which at one point underpinned more than $300 trillion in financial market contracts.
Two years ago the Fed brought together the Alternative Reference Rates Committee to explore potential replacements for Libor. It has pushed for a new benchmark rate based on actual market trades, unlike Libor, which is based on a panel of submissions from different banks. In the Libor rate-rigging scandal, it emerged that several banks had submitted lowball estimates for the overnight rate, holding the benchmark artificially low.
In May, the committee released a report narrowing its search for a Libor alternative to two reference rates. One is the overnight bank funding rate, which has been published by the New York Fed since March. The other is the overnight Treasury-backed general collateral repo rate, a new reference rate that isn't yet being published.
