Switzerland has fleshed out plans for making the Swiss Average Rate Overnight (SARON) the reference rate for new corporate and private loans as the country moves away from the Libor lending standard which is being abandoned after a manipulation scandal.
A Swiss task force concluded that SARON should serve as the rate against which banks set their own lending rates, task force co-chair Martin Bardenhewer said at a workshop on Thursday. As of a year ago, about 6 trillion Swiss francs ($6 trillion) of contracts used the London Interbank Offered Rate (Libor) as a benchmark, making it by far the most important interest rate for the Swiss economy.
The United States, the euro zone, Britain and Japan also need to replace the dominant Libor money market rate, which is being phased out by 2021 after a series of scandals which have seen banks fined billions of dollars.
Libor rates spiked in September 2008 after the collapse of Lehman Brothers at the height of the global financial crisis. Three years later, discount brokerage Charles Schwab filed lawsuits alleging 11 major banks conspired to manipulate the benchmark rate by reporting inflated or deflated interbank lending rates, from which Libor was calculated each day.
The rate is also key to Swiss monetary policy as the central bank steers rates in the Swiss franc money market by saying in what range it intends to keep three-month Libor. Unlike Libor, SARON is not calculated from contributions by individual banks, but rather based on actual market prices. The price is determined via a platform on the Swiss Stock Exchange serving banks and insurers.
That should make it tamper-proof, but there are still complications. Libor measures rates for unsecured three-month Swiss franc loans between banks. This benchmark lets borrowers anticipate their costs for three months in advance. SARON, on the other hand, is a daily rate that calculates the interest rate for secured bank loans overnight. There is a three-month SARON rate, but it is more volatile due to modest trading volumes compared to the overnight rate, Bardenhewer said.
The working group thus opposed using the three-month SARON rate as the basis for new loans. In order for borrowers to be able to estimate their future costs, prices for future contracts should be set on the basis of past and publicly known SARON rates. The task force has not yet decided which period of past prices to use but is due to develop more models by February.