YEREVAN, August 10. /ARKA/. Libor has stopped working and should be replaced, said Sir Mervyn King, Governor of the Bank of England, the Daily Telegraph reports.

Presenting the central bank’s inflation forecasts, Sir Mervyn said that banks had stopped using Libor effectively since the financial crisis. “What’s become apparent is there is no such thing as the interbank borrowing rate,” he said. “The dominant feature in setting interbank borrowing rates is now the credit risk associated with the potential failure of a bank, and that varies from bank to bank.
“So the idea of having a panel to sort out the interbank rate no longer makes sense.” Last week, the Government launched a review into the potential of an alternative rate-setting process in an effort to reform the key interest-rate benchmark that is used to help set the price of mortgages and loans.

The review follows the scandal over banks trying to rig Libor, something which has seen Barclays hit with £290m of penalties, with other banks still being investigated. News of attempts to rig Libor sparked calls for a new benchmark rate that is more transparent and relevant to the current credit worthiness of banks.

“The fundamental question people have to face up to is, does it make sense to base hundreds of billions of dollars and pounds of transactions on linking to something which doesn’t actually exist?” said Mr King. “That may lead people to think about the overnight policy rate as a rate which does always exist. That’s not for me to judge. The real people who should be thinking hard... [are the] pension funds and investors who actually borrow and lend at rates indexed to things like this.” --0--