NY Fed's Williams much work needed in transition from Libor

By Jonnelle Marte

May 11 (Reuters) - The Libor benchmark is unreliable and the market volatility seen at the start of the pandemic is evidence that funding markets based on the rate can crumble under stress, New York Federal Reserve Bank President John Williams said on Tuesday.

"The short-term bank funding markets that LIBOR is based on have withered away since the global financial crisis," Williams said during an event organized by the Alternative Reference Rates Committee (ARRC), an industry group convened by the Fed to lead the transition away from Libor. "Worse, they can dry up completely under stress, as we saw last spring."

Libor, or the London Interbank Offered Rate, is being phased out after several banks were fined billions for colluding to rig the rate. No new Libor contracts will be allowed after Dec. 31, though certain existing U.S. dollar Libor contracts will continue until mid-2023.

But U.S. banks have been slow to offer non-financial firms alternatives to the troubled benchmark, a "concerning" trend because businesses need time to work with their vendors to be sure their systems will be able to accommodate new rates, ARRC said in a progress report released in March.

The Secured Overnight Financing Rate (SOFR) term rate, which ARRC is recommending as the main U.S. dollar reference rate after Libor, "proved to be resilient even during the market stress last spring," Williams said, urging firms to take the transition seriously.

"There is still a lot to be done to move off LIBOR by the end of the year."

(Reporting by Jonnelle Marte Editing by Chizu Nomiyama)