Although it’s been a conversation in the industry since 2014, the dialogue around sun-setting Libor (London Interbank Offer Rate) is intensifying. Published daily, Libor is the interest rate benchmark upon which many other interest rates are based. With its replacement, SOFR (secured overnight financing rate), widely agreed upon, Libor’s planned retirement in 2021 has made advice from industry experts increasingly sound like a stern warning: Prepare for a new rate—now. The effective year is rapidly approaching and most institutions have not even scratched the surface of preparations.
The potential impact to a single bank, let alone the industry, are multi-fold. Anything from commercial and consumer loans, mortgage lending, trading, and deposits could be affected by the transition.
Six key changes inherent in the switch from LIBOR
- Operations: A new reference rate will affect the way contracts are written and potentially how debt is considered and evaluated.
- Technology: How do your core systems need to be updated to account for a new rate?
- Regulatory: Without regulatory guidance in place, your legal teams will have to step into the regulatory void to determine what is legally permissible when changing rates.
- Internal Communications: LIBOR’s scope could yield foundational changes for any bank. A change management plan will be critical to the success of your transition.
- External Communications: With LIBOR affecting commercial and consumer business, education and communication to clients will vary and be tailored to need.
- Governance and Coordination: All policies and procedures must be updated.
Where should mid-market banks start?
While many large global banks are in early stage planning, mid-market banks are particularly behind. Based on our experience in navigating other sweeping regulatory changes, our recommendation is to tackle these four objectives first:
- Identify a Core Transition Team. Start small by assembling a core team of 3 to 5 people to perform an initial impact analysis. The analysis should identify all business units, products/services, contracts, etc., that will be affected.
- Create a Change Management Team. Use the initial impact analysis to identify the broader team that will work on the LIBOR transition. This team should have stakeholders from every business unit that will be affected by the change, plus IT, legal, compliance and marketing representatives.
- Build a Statistical Analysis. Assess the financial impact of the change. Begin by laying out the policy changes that will be implemented and then assess the financial impact of the changes to contracts, trading obligations, etc. This analysis will allow for iteration on the future-state policy once results are analyzed. This will be an iterative process where you may need to test multiple policies and adjust based on results.
- Gain legal consensus. Before you can begin communicating internally or externally, create a clear and legally sound policy that spans immediate impacts, 2021, and beyond. The biggest challenge with the implementation of a new reference rate will be ensuring fair compensation to legacy customers with ties to LIBOR. Leveraging internal and external legal counsel early and often will be paramount.
Has your bank started planning for the transition away from LIBOR? Let’s discuss your plan—or start planning—together. Contact us to start the conversation.