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There’s a worldwide effort underway to replace one of the most popular global benchmark interest rates, the London Interbank Offered Rate (LIBOR).
LIBOR is a rate at which banks can borrow from other banks and is an indicator of the cost of unsecured borrowing in the interbank markets. For decades, many financial contracts have referenced LIBOR to determine the amount of interest a borrower will pay. For example, LIBOR is present in many small business loans, large syndicated loans and commercial real estate loans. It’s also used in consumer products like adjustable-rate mortgages, student loans and some credit cards.
In the United States in 2014, the Federal Reserve organized the Alternative Reference Rates Committee (ARRC) made up of banks, asset managers, corporate treasurers and industry trade associations to select an alternative reference rate to LIBOR.
One of the primary criticisms of LIBOR is that it is increasingly based on estimates submitted by panel banks, which has led to a lack of transparency and volatility, and may make it a less representative rate as time passes. Many industry participants recognize the need for a reference rate that reflects market level interest rates and is rooted in actual trading activity.
In July 2017, the Financial Conduct Authority, which oversees LIBOR, announced that after December 31, 2021, it would not compel panel banks to submit LIBOR data. As a result, there is a strong possibility that LIBOR will permanently cease to exist after December 31, 2021.
Following the guidance from regulators, U.S. Bank will be ready to move from LIBOR to alternative reference rates before the end of 2021. We’ve established an enterprise-wide LIBOR Transition Office (LTO) to lead our preparation for the change. The LTO, with oversight from senior leaders, is working in partnership with designated LIBOR leaders from each business area to make the required changes. We’re well positioned to facilitate a smooth LIBOR transition for our customers and will continue to provide you with information throughout the process.
In the meantime, please review the helpful LIBOR resources provided on this page and stay up to date with key industry developments. We also encourage you to take part in consultations by regulators and industry working groups, and seek independent professional advice on any concerns you may have on this transition.
The London Interbank Offered Rate (LIBOR) is a rate at which banks can borrow from other banks. It’s used as a benchmark interest rate in many financial products, including loans, bonds, and derivative contracts. The rate is published by LIBOR’s administrator, the ICE Benchmark Administration (IBA), every day in five currencies (USD, EUR, GBP, JPY, and CHF) and seven tenor points or time periods (overnight/spot next, one week, and one, two, three, six, and 12 months).
The UK’s Financial Conduct Authority (FCA), the regulator that oversees the setting of LIBOR, announced that it would no longer require participating banks to submit the quotes that determine LIBOR after 2021. As a result, there is a strong possibility that LIBOR will permanently cease to exist after December 31, 2021.
The extensive use of LIBOR in financial markets makes this transition a significant challenge for financial market participants. This transition may impact existing transactions that reference LIBOR, especially transactions with a maturity date beyond 2021.
We encourage you to stay up to date with key industry developments, participate in consultations by regulators and industry working groups, and seek independent professional advice on any concerns you may have on this interest rate benchmark reform.
The Secured Overnight Financing Rate (SOFR) is the recommended alternative to LIBOR. In 2017, the Alternative Reference Rates Committee (ARRC), a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York, identified SOFR as the preferred alternative to LIBOR.
SOFR is different from LIBOR in a few key aspects, including:
SOFR has been selected as the preferred alternate reference rate for USD and is supported by the U.S. regulators. We expect that the bulk of the market liquidity to transition from LIBOR to SOFR especially for derivatives, floating rate notes and securitization. We also expect that some borrowers may prefer to use a rate different to SOFR (e.g. Prime Rate). In addition, some market participants are working on other reference rates (e.g. Ameribor).
We’ve created an enterprise-level LIBOR Transition Office (LTO) to ensure preparedness for the possible end of LIBOR at the end of 2021. The LTO is working with industry working groups and regulators to stay abreast of new developments. U.S. Bank is committed to make the necessary changes and facilitate a smooth transition process for our clients.
This discussion is intended to be informational only and is not exhaustive or conclusive. It is not intended to serve as a recommendation or solicitation for the purchase or sale of any particular product or service. It does not constitute advice and is issued without regard to any particular objective or the financial situation of any particular individual. Some of the information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Other information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or a guarantee of future results. U.S. Bank and its representatives do not provide tax or legal advice. Each individual's financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.
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