Benchmark rates and the need for fallback options

Before concluding, let me say a word on a matter that is very much related to the resilience of European financial markets, namely the ongoing interest rate benchmark reform, where a lot of progress has been made this year. Given ISDA's work to implement more robust fallbacks for derivatives that reference key interbank offered rates, I will focus on the role of fallbacks for EURIBOR.

EURIBOR plays an important role in the transmission of the ECB's monetary policy. It is closely linked to the interest rates that affect many businesses and households in the euro area. More than 80% of new loans to non-financial corporations in the euro area are based on floating rates, and more than 20% of new loans to households, including mortgages, are variable rate loans. In many euro area countries this share is significantly higher.

It is therefore encouraging to see that the EURIBOR reform has entered its final stages. Last month, EURIBOR's administrator, the European Money Markets Institute (EMMI), started to phase in the new hybrid methodology. The relevant supervisory authority, the Financial Services and Markets Authority, is currently assessing its compliance with the EU Benchmarks Regulation (BMR).

The outcome of this assessment is expected to be positive, allowing users to continue to reference EURIBOR beyond the deadline given by the BMR, which is expected to be extended by political agreement to the end of 2021.

Yet EURIBOR, also in its amended form, will ultimately rely on voluntary contributions by its panel banks. The BMR includes the possibility of making these contributions mandatory for a period of time, but eventually it will be up to the market, including users and panel banks, to see whether EURIBOR can be sustained in the long run.

This means that we need to prepare for various eventualities. For this reason, it is important that the working group on euro risk-free rates continues its ongoing work on identifying fallbacks for EURIBOR, based on the ECB's euro short-term rate (€STR) that will be published as of 2 October this year. As a first step, earlier this year the working group recommended a methodology for calculating forward-looking term rates based on the €STR.

However, at the current stage, it is not certain whether and when forward-looking term rates based on €STR will become available, and for which use cases they would be suitable. For this fallback solution to ultimately gain ground, we need the market to start preparing for the use of €STR as soon as possible and to build up liquid derivatives markets.