A senior regulator called for an overhaul of a key interest rate on Monday, telling the European Parliament that the integrity of consumer borrowing is at stake.
Gary Gensler, chairman of the Commodity Futures Trading Commission, suggested that authorities retool or replace the London interbank offered rate, which affects the cost of borrowing for consumers and corporations. Libor, a measure of how much banks charge each other for loans, underpins the cost of trillions of dollars in mortgages and other loans.
“It is time for a new or revised benchmark â€" a healthy benchmark anchored in actual, observable market transactions â€" to restore the confidence of people around the globe that the rates at which they borrow and lend money and hedge interest rates are set honestly and transparently,†Mr. Gensler said in prepared remarks that he delivered via video from Washington. “People around the world saving for the future, using credit cards or borrowing mone y for tuition, cars and homes have a real stake in the integrity of Libor†and other rates like the Euro Interbank Offered Rate, or Euribor.
(Mr. Gensler cancelled his trip to Brussels after a recent “clumsy†fall caused him to break four ribs and puncture a lung.)
In June, Mr. Gensler's agency leveled a $200 million fine against Barclays, accusing the British bank of attempting to manipulate Libor. The settlement was the first of several cases the C.F.T.C. is building against big banks suspected of lowballing rates to protect their image during the financial crisis.
“Naturally, people are wondering if the Barclays situation was isolated,†Mr. Gensler said.
Citing reams of data, Mr. Gensler argued that the problem persists today.
With banks no longer lending to one another, he noted, Libor is not rooted in actual transactions. The United States Dollar denominated Libor rate is also significantly different from the comparable Euribor ra te. The discrepancy, he said, underscores that the rate remains vulnerable to tampering.
“When market participants submit for a benchmark rate lacking observable underlying transactions, even if operating in good faith, they may stray from what real transactions would reflect,†he said.
Some regulators have called for alternative benchmarks, including the overnight index swaps rate, that are based on real transactions. Other options include using short-term bank financing, where banks pledge collateral with other financial institutions.
While Mr. Gensler did not insist on ending Libor, he argued that it might be the safest route.
“Despite a long and painful recovery, sometimes replacement is the better choice when a hip or a knee or even a benchmark rate has worn out,†he said, a nod to his recent medical mishap.
