August 23, 2023
A Requiem for LIBOR: Gary Gensler Was Not a Fan
At the end of last month, in remarks before the Financial Stability Oversight Council, SEC Chair Gary Gensler bid a not-so-fond farewell to LIBOR, the rate that I envisioned guys in bowler hats setting each business day morning in London. In fact, Gensler compared LIBOR to the Hans Christian Andersen folktale “The Emperor’s New Clothes,” in which of course the emperor had no clothes. Gensler noted in his remarks:
Policymakers worldwide, from central banks, including the Federal Reserve; to FSOC and the Financial Stability Board; to market regulators, including the SEC and CFTC; to Congress, came together to end LIBOR. In essence, we all knew we needed an emperor who was properly clothed.
It took a lot of work, but 15 years later, as of June 30, 2023, it finally ceased. In the United States, the main replacement for LIBOR is the Secured Overnight Financing Rate. We cannot, however, stop here.
There will be some pretenders, as there often are in the history of emperors.
It is important that any rate used to replace LIBOR be robust and not ill clad. Certain alternatives being considered in the markets, however, present many of the same flaws as LIBOR: thin markets—in times of stress scantily-clad—with few underlying transactions, creating a system vulnerable to collapse and manipulation.
Gensler reiterated his concerns with so-called “credit sensitive rates,” such as the Bloomberg Short-Term Bank Yield Index rate, which he believes “have infirmities that will not stand the test of time—and will not be good for financial stability or for future FSOC members.” He noted that IOSCO recently conducted a review of some alternatives to USD LIBOR, and the credit sensitive rates that IOSCO reviewed were not found to meet the organization’s principles for stable and reliable benchmarks in the areas of benchmark design, data sufficiency, and transparency.
Gensler closed his remarks noting that “the LIBOR story is a cautionary tale not to just trust something because it’s popular or ubiquitous.”
– Dave Lynn