ECB backs search for new benchmark to replace Euribor
By Marc Jones
LONDON (Reuters) - The European Central Bank called on Thursday for the creation of a new breed of bank-to-bank lending rates to complement and eventually take over from scandal-tainted benchmarks such as Euribor and Libor.
In an article in the central bank's monthly report, the ECB reiterated its plea for banks to stay involved in interbank rate setting and for those who have recently quit as contributors to benchmarks to return while alternatives are constructed.
Doubts over the future of Euribor and its London counterpart Libor have been raised after fixing scandals that have cost major banks fines running into billions of dollars and lost some of their top executives their jobs.
"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.
It is crucial that "continuity is assured at all times" it added. "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."
The European Commission is due to conclude a long-awaited review of interbank lending rates in the coming months that will determine the fate of rates like Euribor.
The ECB said recent work it had done with money market banks showed there was currently too little of the traditional 'unsecured' trading to create a reliable rate based purely on transactions rather than the current estimate-based system that proved vulnerable to manipulation.
But it pressed banks and the agencies that run benchmarks to come up with alternatives at least partly based on real deals that would better suit market needs and rebuild trust.
"The success of a new reference rate depends on the extent to which it is embraced," the ECB said.
"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."
The ECB's rate cut last July - which meant it also stopped paying banks interest on spare cash they park at the bank - had also reduced already-modest money market trading by almost a third, it said.
It also added that the results of its recent work also showed that had Euribor rate been based on actual transactions during the period it studied, they would not have been much different to the ordinal estimates-derived ones.
(Reporting by Marc Jones; Editing by John Stonestreet/Ruth Pitchford)
