ECB Pushes Foot-Dragging Banks to Pick a New Lending Benchmark

  • European bank group has a shortlist of rates to replace Eonia
  • ECB Holthausen says time is short to put new system in place

A railway crossing sign stands outside the European Central Bank headquarters in Frankfurt.

Photographer: Krisztian Bocsi/Bloomberg

The European Central Bank is urging lenders to prepare for the end of key interbank lending benchmarks and accused them of being complacent until regulators stepped up the pressure.

Banks have narrowed down their options for a new system that’s protected from the kind of rigging that discredited benchmarks such as Libor and Euribor. At stake for investors, central bankers and consumers is trust in the data that’s used to value financial assets and make the ECB’s monetary policy work in practice.

Rate Manipulation

European banks have paid hefty fines for rigging interbank interest benchmarks

Source: Company filings

“Banks have been too complacent for a long time, so I’m very happy to see how engaged they are,” said Cornelia Holthausen, an ECB official who sits in on the meetings where bankers talk about how to replace the existing overnight lending rate, called Eonia. “Sometimes you need some pressure.”

Eonia will probably be retired at the end of 2019 and banks are likely to pick a replacement and a fall-back option this year, said Holthausen. That could include a rate known as Ester that the ECB is working on, but the central bank doesn’t have “a strong view” that it should be chosen over another, she said.

Benchmarks like Euribor and Libor were open to manipulation because they relied on estimates made by banks of their borrowing costs. The ECB’s Ester rate would be much harder to rig because it is based on transactions weighted according to volume, Holthausen said. “So you have to have a big transaction in order to have an influence on the rate and that’s expensive.”

Ester won’t be ready until the second half of next year, which is a little close to the 2020 deadline, Holthausen said. Plus, picking a new rate is only part of the battle, given the complexity of amending related contracts, she said. “This issue is manageable, but market participants still claim they need months to do that, and time is scarce.”

Benchmark Heavyweights

France and Germany have a bigger impact on Eonia than smaller countries

Source: European Money Markets Institute, company filings

— With assistance by Alessandro Speciale

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