The Opacity Protection Team notched another victory.  Rather than require banks to provide transparency and end the bankers’ ability to rig the Libor interest rates, the Team is replacing Libor altogether.

Andrew Bailey, chief executive of the UK’s Financial Conduct Authority, announced:

The index will be phased out in 2021 despite a series of reforms put in place to clean up the way the rate is set.

His justification for phasing out Libor was:

The problem, said Bailey, was that the market Libor was trying to measure – the price banks lend to each other – was no longer active in the way it was before the 2008 crisis, when banks funded their business by borrowing from one another.

This market is no longer active for two reasons:

1. It froze in 2008 when banks with funds to lend on an unsecured short-term basis recognized that opacity prevented them from assessing the ability of the borrowing banks to repay the loans.
2. Banks no longer need to borrow funds from each other as they can access all the funding they need from the central banks.

So the hunt is on to find a new “rate” to replace Libor as the reference rate for trillions of dollars of loans and derivative securities.

Please note, this hunt for a new reference rate does nothing to unfreeze the unsecured short-term interbank lending market.  This market is still frozen like a rock almost a decade later as the borrowing banks are still opaque, black boxes.

However, this hunt does take away any pressure on these banks to provide transparency so that Libor could continue to be based on rates charged in the unsecured short-term interbank lending market.