BOE FPC Feared Term Libor Unsustainable, Posed Stability Risk>

     By Jamie Satchithanantham and David Robinson       

     LONDON (MNI) - The Bank of England's Financial Policy Committee 

(FPC) feared that the thinness of the market underpinning Libor made the 

benchmark rates unsustainable and posed a threat to financial stability. 

     Previously deferred text of FPC discussion on Libor, released 

Tuesday, highlighted the depths of the FPC's concerns. There are an 

estimated USD350 trillion worth of contracts around the world based on 

Libor, but the rate is based on a shrinking, unsecured segment of the 

interbank market. 

     The previously redacted FPC discussion from March this year said 

"it had become increasingly apparent that the scarcity of term 

unsecured deposit transactions posed a risk to the medium-term 

sustainability of term Libor benchmarks." 

     If these benchmarks became unavailable disruption of financial 

stability could be large, with so many contracts linked to them and with 

a lack of legal clarity on what happens when no rates are available. 

     The FPC agreed that "market reliance on the Libor benchmark created 

a financial stability risk." 

     The FPC pushed for work to be stepped up on replacing Libor, and in 

April a working group recommended using SONIA, the Sterling Overnight 

Index Average, as an alternative with other central banks also coming 

with similar alternatives in their own currencies. 

     The BOE is now heavily involved in improving the depth and quality 

of SONIA. 

     The FPC chose not to publish its original discussion on the 

shortcomings of Libor fearing it may precipitate the stability risks it 

was hoping to avoid. 

     With a replacement in sight and other work going on to manage the 

transition away from Libor the FPC decided it could publish its 

discussion alongside the minutes of its September 20 meeting. 

     Those minutes showed the FPC in apparent harmony over its view that 

overall financial stability risks were neither particularly elevated nor 

subdued and that the countercyclical capital buffer was likely to be 

raised to 1% from 0.5% in November. 

-London newsroom: Tel+44 203 856 2226; email: 

jamie.satchithanantham@marketnews.com; david.robinson@marketnews.com 

[TOPICS: M$$BE$,MT$$$$]