Also, after the pandemic hit, banks repriced the risks associated with unsecured interbank lending, reflecting higher balance sheet costs due to tighter risk management and implementation of the new regulatory standards. “Interbank market activity is thus unlikely to recover much, even if central banks decide to reabsorb such excess liquidity,” BIS says.
The London Interbank Offered Rate (Libor) is being phased out and banks need to transition to alternative standards by the end of 2021. In July 2017, the Financial Conduct Authority (FCA) in the UK announced the discontinuation of Libor after certain banks provided interest rate figures which did not truly reflect the rate at which they could borrow. This led to the distrust in Libor as an indicator for the real health of the global economy. Banks manipulating the rate were ordered to pay fines.
The CEO of the FCA said that after 2021, the FCA will no longer “persuade or compel” banks to submit the rates required to calculate Libor. The Bank of International Settlements (BIS) says interbank trading has plummeted, especially in the unsecured segment. This was in part driven by quantitative easing.
