The London Interbank Offered Rate, also known as LIBOR, has served as a benchmark interest rate for loans around the world. However, publication of this rate was originally expected to be discontinued at the end of 2021, due to concerns regarding its reliability.
For decades, LIBOR was a convenient way to determine the cost of floating-rate debt around the world. The rate is calculated from a daily survey of large banks that estimate the cost of borrowing from one-another without putting up collateral. Because of concerns about the reliability of LIBOR, British officials announced that they would stop requiring banks to provide a daily quote after 2021, which is expected to result in LIBOR no longer being published. Recently, ICE Benchmark Administration (IBA), the administrator of LIBOR, announced a “consultation,” still subject to final confirmation, that one week and two month US LIBOR rate quotes will cease at end of 2021, and that all other US LIBOR rate quotes will cease at end of June, 2023, effectively discontinuing LIBOR. This delay will help to ensure a more orderly transition away from LIBOR, but it will not alter our transition efforts.
For years, regulators worldwide have raised concerns that LIBOR is an unreliable benchmark because it is not based on a significant volume of observable transactions. The interbank submissions of just 16 financial institutions, for example, are used to calculate the US Dollar LIBOR. Some of these banks have been accused in the past of colluding to manipulate LIBOR rates.
In 2017 the U.K. Financial Conduct Authority, stated that it would not compel LIBOR panel banks to make submissions to determine LIBOR rates after 2021. The Alternative Reference Rates Committee (ARRC), convened by the Federal Reserve Board and the New York Federal Reserve Bank to seek alternatives to LIBOR, has recommended a new index – the Secured Overnight Financing Rate (SOFR) – as the new benchmark for U.S. bond and loan market transactions. The New York Federal Reserve Bank now publishes the SOFR daily, as well as SOFR Averages and a SOFR Index. The number of SOFR-linked products is gradually growing.
The ARRC’s goal is to assist financial institutions in completing the transition from LIBOR to SOFR. Recently, the IBA announced a “consultation,” still subject to final confirmation, that one week and two month LIBOR rate quotes will cease at end of 2021, and that the US LIBOR panel will cease at end of June, 2023, effectively discontinuing LIBOR. This delay will help to ensure a more orderly transition away from LIBOR, but it will not alter our transition efforts.