LONDON/BRUSSELS (Reuters) - A group representing some of the world’s most powerful banks has approached the European Central Bank to seek backing for a new way to calculate the cost of funding after the Libor rigging scandal, people familiar with the matter said.
The approach comes as a collapse in interbank lending and the threat of a regulatory clampdown have put in doubt the future of such benchmarks, driving a search for different ways to anchor the price of funding.
Members of the European Repo Council, a group attached to the International Capital Markets Association (ICMA), whose members include Deutsche Bank and Goldman Sachs, have discussed an alternative to Euribor (Euro Interbank Offered Rate) or its London equivalent with ECB officials.
People who attended the meeting in Frankfurt last month said the group sounded out the central bank about setting up a benchmark based on actual “secured market” trades. Those transactions involve banks providing bonds, shares or other types of assets as security for loans.
“We have Euribor and Libor and we know the problems with them,” said one of the people. “The unsecured (interbank) market is also disappearing. So we need an alternative. A secured index makes a lot of sense.”
Market insiders believe such a move could ultimately lead to phasing out indexes set in this way and which are used to set the price of trillions of euros of products from home loans to derivatives.
The group also asked the ECB to oversee the calculation of the rate, to lend the new index credibility. But the bank’s officials turned down such a role, saying their preference was for such benchmarks to be wholly market-run.
A spokesman for the ICMA declined to comment. And a person familiar with the ECB’s thinking said the central bank did not want an active role.
The discussions are intended to plot a way forward after manipulation of the London Interbank Offered Rate (Libor) led to fines of $450 million for Barclays, hardening resolve for a regulatory overhaul of the methods used to set the price of credit.
The problems may yet widen. Anti-trust authorities are still investigating possible manipulation of Libor and its smaller euro counterpart, Euribor.
And the European Commission is considering rules to change the way such benchmarks are calculated, as well as imposing tougher legal penalties on those who manipulate them.
The new models to calculate funding, which could take many years to realise, would address another problem in a crisis that shows little sign of abating after half a decade: how to calculate an accurate price for funding when banks are unwilling or unable to lend to their peers.
The group that runs Euribor - an arm of the European Banking Federation (EBF) - is examining a similar idea to that suggested by the banking group.
“We plan to work short term on enhancing Euribor governance, process and supervision, and long term to continue working with all the ... stakeholders to see what could be done to adapt the fixing if the market was to change in the coming years,” said Cedric Quemener, director at Euribor-EBF, which compiles the benchmark.
“We ... are already working on a repo real-transaction-based benchmark,” he said. “We have reached a consensus across European banks in supporting the repo effective project (named Reonia).”
By reflecting the price of secured paper, such a model would give a more realistic picture of the price of funding and avoid relying solely on interbank lending.
The move comes as Euribor, the current benchmark used when fixing interbank euro loans, faces pressure to change.
Citigroup, one of the world’s biggest banks and a major player in European money markets, left the Euribor rate-setting panel in September, citing “low interbank transaction volumes in the euro zone”. More than 40 banks remain on the panel.
Citigroup had said last year that it received information requests from investigators looking into interbank offered rates.
Although such “secured” benchmarks are unlikely to be established in the immediate future, the preparation could be the first step towards a gradual phasing out of traditional interbank ratings as a reference for determining the cost of funding.
It would also address the concerns of the European Central Bank, which has pushed for an overhaul of Euribor as well as a possible shift to actual market transactions, sources told Reuters earlier this year.
The European Commission may also ask to shift the basis of the calculation to actual lending rates instead of the current system, which like Libor uses banks’ assessments of what they expect to be charged.
Britain’s top financial watchdog, the Financial Services Authority, has also recommended that Libor be underpinned by actual market transactions where possible, with its governance stripped from an industry body.
The U.S. Commodity Futures Trading Commission (CFTC) wants benchmarks based on real transactions as soon as possible.
In September, the EU’s executive Commission opened talks with the industry about possible curbs on such benchmarks that could lay down stricter rules on how the rate for Euribor is established, as well as enforcing new public supervision.
“This is going to be taken out of the hands of industry,” said one banker. “There is no way, given the importance of these indices, that they will be allowed to remain a best guess produced by industry for industry.”
Adding to this pressure, Joaquin Almunia, the European Union’s anti-trust chief, is investigating Euribor, Libor and other benchmarks for possible breaches of the cartel rules.
He said recently that banks and brokers may have colluded to rig benchmark interest rates, but did not specify which indexes were open to question. If he were to find wrongdoing, those involved could face fines of up to 10 percent of global revenue.
Reuters parent company Thomson Reuters Corp collects information from banks and uses it to calculate Libor rates. It also computes Euribor.
Writing by John O'Donnell, editing by Peter Millership