The system-wide dependence on term Libor fixings is an unnecessary vulnerability. A situation in which robust transactions-based benchmarks were more widely used would improve the resilience of the financial system. This is why the FSB recommended the development and implementation of RFRs. And that is why the Bank – given its interest in effective markets and responsibility for financial stability – is committed to supporting the adoption of near risk-free rates as alternatives to Libor. Put simply, we want to see a transition to a less Libor-centric world. What is the Bank doing? We have taken two important steps to support the implementation of a sterling risk free rate. We have taken on the administration of SONIA, the sterling unsecured overnight interest benchmark, and instituted a reform process to strengthen it. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  And we have set up the Sterling Risk Free Rate Working Group to forge a market consensus on the appropriate near risk-free rate and to coordinate wider adoption. SONIA reform The Bank’s aim in reforming SONIA has been to strengthen a benchmark which is already critical for sterling financial markets, but which is currently based on a market for brokered deposits which has limited transaction volumes. A key change is to broaden the input data to include all overnight unsecured deposits, not just brokered deposits. The Bank was uniquely placed to undertake this reform because we have the necessary data, collected under statutory powers.
2  All speeches are available online at www.bankofengland.co.uk/speeches  2  In effect the benefits of deep and liquid markets – ease of price discovery, minimisation of basis risk, tight bid/offer spreads – have outweighed the fact that Libor may not be a perfect match to users’ underlying needs. Whilst users of Libor clearly benefit from this concentration of liquidity, the flipside is that it makes the adoption of alternatives to Libor a very challenging task. These network effects are reinforced by market convention, accounting practices, and the frictional costs of changing firms’ systems and risk models. And use of Libor is perpetuated by the need to hedge and manage legacy positions. Overall, there is substantial inertia in the use of Libor. The case for change The financial system’s Libor dependency matters for two reasons. First, as I have argued, in many applications users would be better served by a near risk-free rate: the bank credit component of Libor is in these cases neither necessary nor appropriate. Derivatives markets in particular could be more effective if there were liquidity in alternative reference rates. The prospect of improved market effectiveness might not, on its own, justify change. A second factor adds powerful impetus to the case for change. As the Governor emphasised, the truth is that the term deposit markets which underpin Libor fixings are no longer a liquid source of bank funding. Even a reformed Libor will need to rely on expert judgement to supplement transactional data. That is not a desirable state of affairs.