- The Federal Reserve told a judge not to scrap Libor, as requested by consumers in a lawsuit, because it would pose a risk to financial stability and undermine years of global planning for a transition to new benchmark borrowing rates.
A staged transition away from the London Interbank Rate is underway globally, but immediately ending the London Interbank Rate would likely harm consumers and businesses, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of San Francisco said in a filing Friday in federal court in New York.
Dozens of consumer borrowers and credit card users are seeking an injunction to terminate Libor, claiming the benchmark is the work of a "price fixing cartel". The plaintiffs are also seeking monetary damages.
But ending the benchmark now would likely disrupt the trading of financial contracts, upend consumer contracts like mortgages and student loans and cause "an avalanche of litigation," the Fed said in its filing. The Central Bank says that about $223 trillion of financial products are tied to the U.S. dollar libor rate by the central bank.
Without an orderly transition away from Libor, there would undoubtedly be confusion and uncertainty in all markets that rely on Libor currently to do day-to-day business, the Fed said in the filing.
Libor is derived from a daily survey of bankers with estimates on how much they would charge each other to borrow. In the wake of the 2008 crises, regulators discovered that lenders were manipulating the rates to their advantage, resulting in billions of dollars of fines.
Regulators and market participants around the world are currently in the process of shifting to new benchmarks to replace the scandal-plagued suite of Libor rates. The state contracts tied to nominal Libor in the US are supposed to end this year and the final setting should be phased out by mid 2023 according to current timetables.
The threat of an abrupt end to Libor has also drawn vigorous defenses from some of the world's biggest banks.
The Fed's filing echoed claims made by defendants in November including the JPMorgan Chase Co. Credit Suisse Group AG and Deutsche Bank AG, who argued an injunction abruptly ending Libor would wreak havoc on financial markets.
In June, the judge overseeing the case refused to move the suit from New York to San Francisco, rejecting an argument by big banks that the case belongs in Manhattan due to the decades of litigation over the benchmark and court decisions it has produced.
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