FRANKFURT (Reuters) - The European Central Bank will develop a new overnight reference interest rate by 2020, it said on Thursday, potentially creating a new benchmark after industry players failed to revamp existing facilities hit by fraud and dwindling liquidity.

The European Central Bank (ECB) headquarters is pictured in Frankfurt, Germany, December 8, 2016. REUTERS/Ralph Orlowski

Benchmarks such as the Euro Interbank Offered Rate (Euribor) and Euro Overnight Index Average (Eonia) are used to calibrate monetary policy, price trillions of euros worth of derivatives and, in some countries, to determine interest rates on mortgages.

But confidence in them has waned as allegations of fraud and sharply lower volumes raised the specter of distortions that could affect asset prices and thwart the transmission of the ECB’s monetary policy to the real economy.

“Both benchmarks rely on the voluntary contributions of two distinct panels of banks, the number of which has fallen sharply in recent years,” the ECB said.

“The (new) interest rate, which would be produced before 2020, would complement existing benchmark rates produced by the private sector and serve as a backstop reference rate,” the ECB statement said.

But the ECB’s power to replace existing benchmarks is limited as it can only calculate an overnight rate since rates on longer maturities could be interpreted as a desired policy stance, it said.

To provide an alternative for longer dated Euribor, the ECB also said it would work with other European agencies, including the European Commission, to identify a new rate that may serve as a benchmark.

That working group may choose the ECB’s new rate as its overnight benchmark but could also opt for an alternative as they select one or more reference rates, the agencies said.

The European Commission estimates that Euribor underpins contracts with a nominal value of about 180 trillion, making it a vital instrument.

But industry-led reform collapsed when bank complained that a new transaction-based system would have an excessive impact on rate levels, volatility and transaction volumes.

“It appears that currently there are not enough transactions to construct purely transaction-based longer-tenor reference rates,” the ECB said.

“This means that some expert judgment may be required in order to sustain daily benchmark publications on such tenors,” it said. “Such judgment cannot come from a central bank.”