Alternative Reference Rates: Meeting the Challenges

Guest post by Richard Berner, Executive-in-Residence (Center for Global Economy and Business) and Adjunct Professor, NYU Stern School of Business

In response to the fragility of LIBOR and other interest-rate benchmarks, regulators globally are working with industry to identify sturdy alternatives. Despite significant progress, concerns persist that the transition to these new reference rates will be disruptive.

While these concerns are legitimate (see Eclipsing LIBOR), both U.S. and global authorities and market participants have begun to address them in ways that should go a long way to managing the risks. In this post, we review why LIBOR’s persistent fragility makes reform critical, and examine progress on some of the ongoing reforms....

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Regulatory quakes and tremors

If there were a regulatory Richter scale that measured the shaking of the financial system, the 2010 Dodd-Frank Act would register about 8, while the 2011 Basel III framework might be a bit above 7.  (For reference, the 1906 San Francisco earthquake was a 7.8). Fortunately, this shaking is mostly for the better – helping to make the financial system more resilient in the long run.

The new “Bailout Prevention Act” of Senators Vitter and Warren also might be an 8 on the shaking scale, but it would be a true disaster, because it undermines the Fed’s role as crisis lender of last resort. In contrast, the Senate Banking Committee’s new discussion draft of a “Financial Regulatory Improvement Act of 2015” is probably a 2 or a 3. If enacted, it will be “felt slightly by some people” but probably won't do much damage...

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