##bor measures. 5 we have seen the benefits of those reforms through the first half of this year as banks have continued to lend and markets have remained open. and central bank facilities such as the bank of england ’ s term funding scheme have offered a cost effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets. these changes have led many banks to choose simply not to borrow in unsecured markets as the costs increase. overall, this leaves libor rates capturing ( at best ) only a tiny fraction of overall funding costs even in benign market conditions. as transactions become scarce during periods of stress, this reduces yet further. for example, during march and april libor rates were impacted by liquidity mismatches in money market activity. money market funds, that are important investors in unsecured bank funding markets, experienced large outflows, the so called ‘ dash for cash ’. this meant libor linked borrowers were immediately exposed to a sharp increase in rates driven by these more esoteric liquidity factors in addition to any perceived changes in bank credit risk. when the banks that provide the data on which the libor rates are based can ’ t reference actual transactions that they have undertaken, they are asked to provide libor ’ s administrator with a submission based on transactions in other markets, where they are able. more commonly though, those data aren ’ t available either, so they have to rely on ‘ expert judgement ’ which is an estimate of the rates that the firm would expect to pay in those wholesale unsecured funding markets. it is simply not desirable for spikes in libor rates, which banks are largely insulated from in terms of their own cost of funding, to nevertheless result in those costs being passed directly onto businesses and households. interim financial stability report, may 2020 – box 1 the continued importance of the transition away from libor, https : / / www. bankofengland. co. uk / - / media / boe / files / financial - stability - report / 2020 / may - 2020. pdf for example see how correlated is libor with bank funding costs? https : / / www. federalreserve. gov / econres / notes / feds - notes / howcorrelated - is - libor - with - bank - funding - costs - 20200629. htm all speeches are available online at www. bankofengland. co. uk /

news / speeches the factors impacting libor can be far removed from the risks reflected in the borrower ’ s own credit worthiness and can introduce significant, and for many impenetrable, volatility in interest rates. financial markets should not amplify these risks and pass them through to the real economy. so what ’ s the alternative? so if libor isn ’ t a robust and transparent basis for determining funding costs for firms and households – is it possible to create such a benchmark that is sufficiently robust? well, some years ago now, working groups made up of industry participants in libor jurisdictions recommended near risk - free rates as the alternative. and more recently we have seen the market develop products using these rates. it is a fact that homes and businesses with loans linked to these rates have seen greater direct benefit from the action taken by central banks during the covid disruption and have not been as exposed to movements in libor rates impacted by the scarcity of underlying transactions. many more deserve the same protection. there is no one size fits all approach, and while there is a common view across jurisdictions that liquidity should move to overnight near risk - free rates where appropriate, this is not to exclude the use of other robust benchmarks. there is a workstream under the us working group – the arrc6 – that is currently looking at the potential to develop alternative dollar reference rates that include a credit - sensitive spread element, perhaps as an alternative or add - on to the new near risk - free rate across a subset of products. but market demand for credit - sensitive rates that seek to reflect changes in bank funding costs and directly pass these on to borrowers cannot come at the expense of ensuring those rates are sufficiently robust. introducing new approaches that simply replicate the inherent weaknesses of libor would be a failure. would - be producers of such rates face the challenge of doing so in markets where liquidity may be thin or variable. those choosing to use such rates would need to understand the exposure they were taking on to the liquidity conditions in those markets, and the volatility in the benchmark rate this could cause. we will continue to work domestically and internationally to prevent financial markets being materially exposed to risks from fragile benchmarks in terms of both the integrity of those rates and ensuring continuity of provision. the alternative reference rate committee is a group of private market participants convened by the federal reserve board and new york fed to help ensure transition from u. s.