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(Bloomberg) -- The Swiss National Bank faces the prospect of adjusting its monetary-policy framework because the interest-rate benchmark it targets will be discontinued in 2021.
The SNB has been targeting three-month Swiss franc Libor since 2000. Yet Libor, the benchmark underpinning more than $350 trillion of financial products, will be phased out by the end of 2021, as U.K. regulators and banks look to replace the scandal-tarred indicator with a more reliable system. SNB spokesman Walter Meier declined to comment.
Libor is determined by banks estimating what it would cost them to borrow unsecured funds from one another in five different currencies. U.K. regulators say the market supporting Libor is no longer sufficiently active to determine a reliable rate.
The SNB has “got this target range for three-month Libor, that means they’ll need to rethink their approach,” said David Marmet, an economist at Zuercher Kantonalbank. “The instruments exist for the interbank market. If the SARON should gain traction, one asks if they can just use that instead?”
In the wake of the manipulation allegations, Switzerland’s central bank joined international efforts to reform reference rates. There has also been a Swiss working group looking at the two rates for the local money market, the secured Swiss Average Rate Overnight, or SARON, and unsecured TOIS, with the latter to be discontinued by the end of 2017.
The problems with Libor were similar to that of TOIS, according to SNB Alternate Governing Board Member Dewet Moser.
“The calculation basis for the reference rate is too narrow, there are hardly any transactions in the relevant segment,” he said in a speech in Zurich on March 23. “Yet Libor remains most frequently used for credit contracts in francs.”
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