European Central Bank (ECB) on Thursday reiterated in its monthly report the call for a new type of benchmark for interbank lending rates, replacing the reference rates tainted by scandals, such as Euribor and Libor.
“Further steps need to be taken to explore alternative reference rates that are more transaction-based and that could be a potential substitute for the current reference rates,” the ECB said.
The ECB argues that banks should continue to be involved in setting the interbank rates, and those who have given up their contribution to reference rates to come back, while the search for other alternatives is on.
Doubts about the future of Euribor and Libor emerged in the context of scandals that cost big banks billions of dollars and top positions of their executives.
ECB said that it’s very important that “continuity is assured at all times,” and added that “Systemically important reference interest rates such as Euribor and Eonia are of particular importance in terms of credit provision to the euro area economy and for the implementation of the single monetary policy.”
European Central Bank announced that recent studies have shown that little is done in the industry to establish a reliable indicator to replace the current system based on estimates that led to interest rates manipulation scandals.
“The success of a new reference rate depends on the extent to which it is embraced,” said the ECB.
ECB will conclude in the next few months a review of interbank lending rates which will decide the future of Euribor and Libor. The last rate cut by the ECB in July has reduced the money market trading by almost a third.
“Under these circumstances, it could be appropriate, from a policy perspective, to consider encouraging the adoption of a more representative reference interest rate, reflecting active and liquid transactions in the interbank market, which remains resilient in times of stress,” reads the ECB report.
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