UK watchdog says banks agree to back Libor until 2021

By Huw Jones

LONDON, Nov 24 (Reuters) - Britain's markets watchdog said banks have agreed to continue supporting Libor until an alternative interest rate benchmark is phased in after 2021.

Banks were fined billions of dollars for trying to rig Libor, used as a reference price to $350 trillion in home loans to credit cards, prompting central banks to look for alternatives.

The Financial Conduct Authority (FCA) said on Friday it had reached an agreement whereby all 20 banks on "panels" that submit quotes for Libor, or the London Interbank Offered Rate, would support the benchmark until the end of 2021.

The watchdog does not have powers to force banks to continue submitting for such an extended period and needed their backing to avoid potential disruption in markets if many banks began pulling out of panels.

FCA Chief Executive Andrew Bailey said in July that despite safeguards to make rigging harder, the underlying market for borrowing between banks is too thin.

He said alternative benchmarks were needed, effectively sounding the deathknell for Libor.

Market participants have already accepted that the Bank of England's "Sonia" overnight rate will be the main alternative to sterling Libor because it is based on actual transactions.

"The FCA welcomes the support and agreement of all banks to remain as submitters until 2021," the watchdog said in a statement.

SocGen (Paris: FR0000130809 - news) has pulled out of the U.S. dollar Libor panel, while Credit Agricole (Swiss: ACA.SW - news) will cease submitting quotes to the Japanese yen panel, it said.

The FCA does not expect any further changes to panels.

"Based on this support until the end of 2021, the FCA expects focus to turn towards developing alternative rates and working towards a transition that can be executed smoothly," the watchdog said.

Market participants have said the transition presents a big challenge and risks creating turmoil as existing contracts that reference Libor can run for decades, well beyond 2021.

Central banks in Switzerland and the United States are also taking steps to replace Libor with alternative rates in their currency denomination. The European Central Bank has also looking at similar action.

(Reporting by Huw Jones; Editing by Edmund Blair)