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The Editors

Saying Goodbye to Libor Won’t Be Easy, but It’s Necessary

Amid the investigations into manipulation of Libor, policy makers are coming around to the idea that the world needs a new benchmark to price hundreds of trillions of dollars in loans, securities and derivatives. The challenge will be getting banks, investors and borrowers to agree on what that benchmark should be.

Even when it was created some three decades ago, the London interbank offered rate was far from ideal. Its aim was good: to provide an objective measure of banks’ borrowing costs, so that the parties in financial contracts would see that they were getting a fair deal. Lenders, for example, could peg payments to an interest rate that more or less tracked how much they paid to borrow money, while borrowers could consult the measure to be sure they weren’t being overcharged.