New York Fed President John Williams said Monday that the central bank acted quickly during last week's jolt to overnight lending markets and that the issue appears resolved for now.
However, he cautioned that short-term lending markets face another crisis, though a few years in the distance, if banks don't prepare themselves for when the London Interbank Offer Rate, or LIBOR, is phased out. LIBOR is used as an international benchmark for overnight lending.surged Monday night amid a liquidity crunch
However, he conceded that the issues were worse than expected, culminating in the Tuesday morning surge that saw repo rates hit 10% as "it became clear that this situation had persisted and had the potential to become more acute." The rate comes from surveys of banks on what they will charge their peers to borrow money over short periods, like one and three months. The system had been efficient and relatively unnoticed until a scandal erupted in 2012 in which some banks were manipulating LIBOR by reporting either artificially high or low numbers in order to benefit derivatives traders.
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