With $150 Trillion at Stake, Tainted Libor Benchmark Won't Die Quickly

Dogged by one of the worst price-manipulation scandals in the financial industry's history, JPMorgan Chase & Co.  (JPM) , Citigroup Inc.  (C) and other big banks are slowly moving to change the way global interest rates are set, setting up a costly shift that could disrupt markets worth more than $150 trillion.

But the sweeping changes could take years to put into effect. And it's possible they may never happen.

The firms, including European rivals Barclays (BCS) , Deutsche Bank AG (DB) and UBS Group (UBS) , already have paid more than $9 billion of fines to U.S. and European regulators over alleged manipulation of the London Interbank Offered Rate, or Libor -- the benchmark used to set short-term interest rates on everything from trading contracts and corporate loans to adjustable mortgages and bonds.

Now, after a three-year push by regulators, the banks have agreed on a new benchmark rate that could eventually replace Libor. On June 22, a committee of 15 of the world's largest banks settled on the "broad Treasuries repo financing rate," developed by the Federal Reserve Bank of New York. The rate is linked to the cost of borrowing U.S. Treasury bonds overnight, a common practice among Wall Street dealers and big money managers.

Yet much remains to be done before the new rate displaces Libor as the global standard. The New York Fed won't start publishing the rate until the first half of next year. After that, banks would have to convince big corporations and other borrowers to switch over, or to renegotiate loans and financial contracts that have been based on Libor for more than three decades.

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Given the costs and hassle of making the transition, as well as the built-in advantages that big lenders reap from setting Libor, the banks have little motivation to move quickly, said Kurt Dew, an economist who helped develop interest-rate futures contracts at the Chicago Mercantile Exchange in the 1980s.

"It's all smoke and mirrors," Dew said in an interview. "The rate they use doesn't really matter. The real question is whether the banks are willing to surrender their oligopoly."

Libor is supposed to represent the average cost banks have to pay to borrow money from each other. For years, daily surveys to determine it were conducted by the British Bankers' Association, putting the lenders themselves in charge of determining the benchmark interest rate that customers would pay.

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