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The Swiss National Bank is dumping Libor and using a new rate to set policy, part of a shift worldwide in the wake of a manipulation scandal that’s undermined the benchmark’s credibility.
The move in Switzerland -- which ends a link going back two decades -- has been in the works for some time. The central bank is making the leap now as Libor’s end date has been set for 2021. That has implications for the SNB’s three-year forecast horizon, because policy makers want their medium-term economic projections to be based on a single rate.
The new SNB policy rate will target short-term rates on the money market, President Thomas Jordan said. Such rates can be measured by the transaction-based Swiss Average Rate Overnight, or SARON. The goal is for SARON, which has been in place for a decade and is administered by the stock market operator SIX, to be close to the rate communicated by the SNB.
Swiss franc-Libor rates underpin about $6.5 trillion of financial products and are used to price about 80% of banks’ loans. SNB policy maker Andrea Maechler said the switch will present challenges but bring benefits. Unlike Libor, it’s based on trades and binding quotes, and the market segment is “broader and more liquid.”
There’s been much criticism of Libor in recent years. Earlier this month, the Bank of England held an event -- “Last Orders: Calling Time on Libor” -- where Deputy Governor Dave Ramsden called it an “unsustainable piece of infrastructure.” He said its usage “creates a fragility at the heart of markets.”
Ramsden said financial firms must do more to move away from Libor, something Maechler echoed on Thursday.
“It is the responsibility of market participants to systematically complete the remaining transition work and prepare themselves for the post-Libor era,” she said. “The faster SARON is integrated into financial products, the smoother the replacement of Libor will be.”
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