From LIBOR to SONIA: a bridge to the future
Andrew Hauser explains why companies need to act now to transition from using LIBOR to SONIA as an interest rate benchmark. Andrew speaks as the Executive Director for Markets at Bank of England at the 'Is Your Business Prepared for LIBOR?' webinar.
(In reference to the Hammersmith Bridge in London)
"So the local council has closed the bridge – it had no choice. But the disruption has been huge. Journeys that used to take a few minutes can now take hours. There are traffic jams everywhere. And protests have become so vocal that the secretary of state for transport has responded by setting up a dedicated task force.
LIBOR’s a bit like that bridge. It’s been around since the 1960s. Every company has got to know it inside out, and built it into their daily routines. And it’s popular – very popular: almost 400 trillion dollars of financial instruments, across every part of the global economy, are tied to LIBOR in some way.
But just like that bridge, it isn’t safe. Structural change in the financial markets mean that the trading that used to underpin LIBOR – term unsecured lending between banks – has virtually disappeared. In its place lies little more than informed guesswork. And that just isn’t a viable long-term basis for the debt and financial instruments on which all your businesses rely. Sooner or later, a benchmark based on such shaky foundations will collapse. Just like Hammersmith Bridge. Only it won’t be a few thousand disadvantaged families, it could be the entire global financial system that suffers, with unimaginable consequences."