Regulators: Please Stop Using LIBOR
As 2020 winds down, bankers will need to reprioritize efforts on a long-running project that may have gotten sidelined — transitioning away from the LIBOR interest rate benchmark that lenders have relied on for years.
Scandals following the last financial crisis exposed vulnerabilities within the widely used London Interbank Offered Rate, or LIBOR. Many banks assumed they would spend 2020 doing the transition work ahead of its full phase out in 2023 — a project that may have been waylaid by the coronavirus pandemic.
Banks procrastinating on this transition are running out of time; some institutions are even incorporating the rate into new contracts and transactions, which could cause headaches later. The three federal banking agencies published a statement this week urging banks to “cease entering into new contracts” that use U.S. dollar (USD) LIBOR “as soon as practicable and in any event by [Dec.] 31, 2021.”
“Failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks’ safety and soundness,” the regulators said.
For many U.S. banks, that has meant electing the Secured Overnight Financing Rate (SOFR), although some have opted for the American Interbank Offered Rate (AMERIBOR), which is published by the American Financial Exchange. The Alternative Reference Rates Committee, the private-market group advising the adoption of a new reference rate in the U.S., has also published a guide to help banks transition.
“The checklist for banks really centers around understanding what you own. That’s the beginning of it. Understand what you own and where LIBOR exists,” Jennifer Press, a managing director at Duff & Phelps and part of the firm’s alternative asset advisory group, tells me. “That’s step one. You can’t begin to formulate the plan of how you’re going to transition away from LIBOR until you understand exactly what your business exposures are.”
It’s on banks everywhere to start this work — and fast.
• Kiah Lau Haslett, managing editor of Bank Director