THE LIBOR TRANSITION: WHAT YOU NEED TO KNOW
Replacing the world’s most widely used interest rate benchmark and how it impacts you.
FirstBank, along with the entire financial industry, is currently in the process of moving away from the most commonly used worldwide interest rate benchmark for the last thirty years. The London Inter-Bank Offered Rate, more commonly known as LIBOR, will no longer be available as a reference rate for new origination after December 31, 2021.
Banks have relied on LIBOR to determine the interest rates charged to borrowers on products including commercial loans, small business loans, adjustable rate mortgages, credit cards, and many others. The market has yet to achieve a consensus on the benchmark rate that will ultimately succeed LIBOR for determining interest rates, but some of the leading contenders can be viewed in the FAQ section below. FirstBank will be reaching out to customers impacted by the LIBOR transition, and no action is required by our customers at this time.
FirstBank continues to monitor market developments and will provide additional information pertaining to the LIBOR transition as it is available. This transition will impact all loans, leases, contracts and swaps with LIBOR references. Please see the below FAQs for more details on the LIBOR transition at FirstBank and reach out to your FirstBank relationship manager with any questions or concerns.
The Information provided on this page is of a general nature only and is not intended to and does not constitute the provision by FirstBank of any investment, legal, tax, or accounting advice. Opinions and disclosures expressed herein are subject to change without notice. While the information contained herein was obtained from sources deemed reliable, such information is not guaranteed as to its accuracy. You are encouraged to obtain independent, professional advice from your advisors, accountants, and attorneys on the matters set forth herein.
LIBOR Benchmark Transition FAQs
The London Interbank Offered Rate (LIBOR) is a benchmark interest rate meant to represent the rate at which banks would lend to other banks for a specified amount of time on an uncollateralized basis. LIBOR is calculated and published daily across five currencies with seven different maturities, from overnight to 12-months, using submissions from 16 panel banks. Since the 1980s, when formalized publication of the index began, it has been a popular choice by financial institutions to determine short-term interest rates and for variable rate products such as credit cards, mortgages, commercial loans, and derivatives. As of May 2021, approximately $200 trillion in outstanding contracts are linked to USD LIBOR.
A combination of new regulations and changes to how banks fund themselves has caused the underlying transactions for LIBOR calculations to dwindle. Calculations have relied heavily on “expert judgment” by the LIBOR panel banks due to the limited number of actual transactions for reference, which leaves the rate prone to manipulation.
LIBOR’s inadequate underlying transaction volume and resulting inability to ensure true market representation has led regulators to decide that the financial industry should no longer reference the rate. The Alternative Reference Rate Committee (ARRC) was created in 2014 by the Federal Reserve for the purpose of identifying robust alternatives to USD LIBOR and supporting the transition to a new index. In 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it would not compel panel banks to submit to LIBOR past 2021. With this announcement, financial institutions were given a LIBOR publication end date to reference while developing timelines for a transition plan to a new benchmark rate.
There are multiple potential replacements, but those garnering the most attention by the market are the secured overnight financing rate (SOFR), U.S. Prime Rate, Bloomberg Short-Term Bank Yield Index, ICE Bank Yield Index, and AMERIBOR. Since 2017, the ARRC has been recommending SOFR as its preferred alternative, though widespread adoption of SOFR as a LIBOR replacement in all scenarios is not guaranteed and progress has been slow.
Instead of using a single alternative for all LIBOR production, institutions may use a combination of the options listed above depending on the type of product and on borrower needs.
Publication of the 1-week and 2-month tenors of USD LIBOR will cease after December 31, 2021. The remaining tenors will continue to be calculated and published daily through June 30, 2023, though regulators have established a cutoff date of December 31, 2021 for any new production referencing any LIBOR tenor.
Contracts that reference LIBOR and mature on or before June 30, 2023, will not be impacted. Contracts that reference LIBOR and mature after June 30, 2023, will be assigned a new benchmark interest rate. FirstBank is giving due consideration to all possible LIBOR alternatives and will work with impacted customers to ensure the new benchmark is consistent with accepted market practices and substantially equivalent to the LIBOR index rate.
Customers impacted by the discontinuation of LIBOR will be notified by FirstBank in a timely manner with realistic notice of the new benchmark prior to transition.
Your FirstBank Relationship Manager is available to address any questions you might have.
The Bank has established a LIBOR Transition Working Group consisting of key contributors across departments impacted by the transition. The group is working to address all potential risks in order to ensure a smooth and transparent transition for both customers and the Bank and minimize any potential disruptions.
The group is also actively monitoring the development of all potential LIBOR replacements and analyzing each to determine the best fit for our customers and the Bank. We will work together with our customers to communicate updates as they become available.
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