Speaking in front of European Parliament on Monday, CFTC chairman Gary Gensler addressed the issue of whether LIBOR will survive its recent setbacks.
Gensler, appearing via video feed, was unable to travel to overseas due to four broken ribs and punctured lung from a recent fall. He compared his own injuries to LIBOR’s.
“The question is can LIBOR be sufficiently mended, or is this a circumstance where it’s better to be replaced with a rate based on observable transactions?”
Injuries to LIBOR
Gensler outlined the outstanding problems with LIBOR.
“The first and possibly the most significant issue with LIBOR is that the number of banks willing to lend to one another on an unsecured basis has been sharply reduced,” Gensler said.
He went on to add that lack of oversight and conflicts of interest have raised concerns about whether the Barclays case was isolated.
“I believe this market data says something about the health of this patient, LIBOR, that goes beyond the Barclay’s case,” Gensler said.
Gensler was adamant that either LIBOR or its successor must employ observable transactions. As to whether LIBOR will survive?
“International regulators and market participants can work to address LIBOR’s issues of governance and conflicts of interest, but the fundamental issue remains: the underlying market for unsecured interbank borrowing has largely diminished,” Gensler said.