Banks Take Key Step in Replacing Tainted Euro Rate Benchmarks

(Bloomberg) -- Euro-area lenders took a big step forward in replacing scandal-plagued interest-rate benchmarks, settling on a new overnight borrowing rate that could be used in developing a fallback for contracts tied to Euribor.

A group of banks recommended the euro short-term rate, or Ester, as their preferred new gauge of how much they charge each other for borrowing, the European Central Bank said. Use of the existing benchmark -- the euro overnight index average, or Eonia -- will be restricted in 2020 because it doesn’t comply with European Union standards.

Thursday’s decision by the group, whose members include BNP Paribas SA and Deutsche Bank AG, leaves open the question of what will happen with Euribor, a separate euro rate used widely in derivatives and mortgage markets. A lot will depend on the fate of ongoing efforts to reform Euribor, said Deepak Sitlani, a partner at Linklaters in London.

“It remains to be seen whether the reforms that are being investigated will be sufficient to permit continued use of Euribor, and hence do away with the need to transition Euribor products to Ester,” he said.

Rate Rigging

The selection of the new euro-area rate comes after similar decisions in the U.S. and U.K. to adopt new benchmarks to allow the phasing out of dollar and sterling Libor. After billions of dollars in fines and years of rigging investigations around the world, regulators have pressed the industry to hurry up and transition to new rates based primarily on actual transaction data rather than bankers’ estimates of borrowing costs.

The ECB’s Ester would be much harder to rig because it is based on transactions weighted according to volume, officials have said.

Ester reflects wholesale euro unsecured overnight borrowing costs of euro-area banks, and will be produced by the ECB by October 2019 at the latest. The group of banks had considered alternatives produced by Deutsche Boerse AG and NEX Group Plc.

That schedule would leave banks little time to switch over from Eonia before 2020, Sitlani said. “If Ester only does become available in October 2019, there is clearly a need for the market to be given more time to sensibly adopt the rate,” he said.

©2018 Bloomberg L.P.