BOE extends deadlines in crackdown on scandal-hit LIBOR rate

The Bank of England has delayed plans to encourage banks to abandon the London interbank offered rate, as efforts to phase out the discredited benchmark falter.

Moves by the BOE to use its lending operations to promote replacements will be delayed until April 2021, from October 2020. The measures involve increasing so-called haircuts applied to banks using LIBOR-linked collateral to borrow, in an effort to make alternatives more appealing.

LIBOR underpins trillions of dollars in financial assets and is set to expire at the end of 2021. But its dominance has proved stubborn, most lately because of the market turmoil unleashed by the coronavirus pandemic.

Currently, the BOE makes an average reduction of 25% on the value of LIBOR-linked collateral when deciding how much to lend, in the process known as haircutting. The changes will mean firms will be able to borrow less money from the central bank if they cling to the use of LIBOR.

"The haircut add-on will be 10 percentage points from April 1, 2021, 40 percentage points from Sept, 1, 2021 and 100 percentage points from Dec. 31, 2021," the BOE said in a statement. "For the avoidance of doubt, haircuts will be capped at 100%."

Regulators on both sides of the Atlantic have spent the better part of three years trying to kill LIBOR. Now, they're looking to it once again to underpin hundreds of billions of dollars in loans as they seek to rescue their economies.

For decades the rate served as a benchmark set daily by banks to determine interest rates on everything from student loans and mortgages to derivatives and credit cards. But European and U.S. banks were found to have manipulated rates to benefit their own portfolios.

U.S. policymakers last week turned to LIBOR as the benchmark for their $600 billion Main Street Lending Program, which will buy debt from potentially hundreds of companies. The move came a day after U.K. officials granted banks a six-month extension to keep issuing loans tied to LIBOR.