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

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