Libor (London Interbank Offered Rate) is a reference interest rate for the international money market calculated by banks.
SARON (Swiss Average Rate Overnight) is a reference interest rate for the Swiss money market calculated by the Swiss National Bank.
The main difference between Libor and SARON is that Libor is used globally and SARON is used only in Switzerland.
Why was SARON introduced in Switzerland?
SARON was introduced to provide a transparent and robust reference interest rate for the Swiss money market. It was intended to be an alternative to Libor, which had fallen into disrepute in the past due to allegations of manipulation.
In 2011, for example, the following scandal became public knowledge:
The Libor rate is set daily, but is not based on actual transactions, but on reports from the banks involved, which grant loans for a corresponding period, often for three months.
Since this rate is not linked to actual transactions, banks manipulated it for their own benefit in 2011, causing a major loss of confidence in Libor.
SARON advantages over Libor
- Transparency: SARON is directly linked to real transactions in the Swiss money market, which increases the transparency and representativeness of the interest rate.
- Robustness: SARON is based on a larger volume of transactions than Libor, which improves the stability and robustness of the interest rate.
- National relevance: SARON is specific to the Swiss money market and provides better insight into local interest rate conditions than a global rate such as Libor.
- Regulation: SARON is subject to tighter regulation by the Swiss National Bank, which helps to prevent manipulation attempts.
What would happen if Libor was active in Switzerland again?
It is difficult to predict what would happen if Libor were reintroduced. However, here are some possible effects:
- Market turbulence: Libor has fallen into disrepute in the past because of manipulation allegations, which could lead to market turbulence if it were reintroduced.
- Loss of confidence: it is uncertain whether confidence in Libor can be restored after it has fallen into disrepute due to allegations of manipulation.
- Regulation: Libor would likely be subject to tighter regulation to prevent such allegations of manipulation from recurring.