Life after Libor: A new era of reference interest rates

Andréa M. Maechler / Thomas Moser, Member of the Governing Board / Alternate Member of the Governing Board

Virtual Money Market Event, webcast, 31.03.2022

A new era of reference interest rates began at the start of this year. Libor, which had been the key reference rate for several decades and several currencies, including the Swiss franc, ceased to exist in many currencies at the end of 2021. SARON has now fully replaced Swiss franc Libor.

This speech explains why reference rates play a central role in financial markets and discusses the circumstances under which some interest rates either achieve or lose reference rate status. Following the Global Financial Crisis of 2007 to 2009, Libor increasingly failed to satisfy two important criteria for reference rates - reliability and robustness - and had to be replaced by alternative reference rates. Given the huge importance of reference rates, intensive work was required to replace Libor.

The switch from Libor to new reference rates entailed far more than just swapping out one rate for another. Market practices had to adjust because the new reference rates differ in important respects from Libor. The speech examines the most important properties of the new reference rates and how they differ from Libor.

Reference rates are also critically important for the transmission of monetary policy. The speech therefore also discusses the adjustment the SNB made to its monetary policy strategy in response to the transition to SARON and the implications for monetary policy implementation.