Big banks say pandemic will not impact efforts to drop Libor

June 16, 2020.

Big banks do not see the coronavirus pandemic impacting their timelines to ditch the London Interbank Offered Rate by the end of 2021, as required by regulators, while some smaller firms are hoping to see the deadline pushed back, new research released Monday by Sia Partners shows.  

The management consulting company surveyed more than 70 market participants, including U.S. and foreign banks, asset managers, fund managers and insurance companies between the months of April and June to determine whether market disruptions caused by the global pandemic are impacting efforts to end the use of the Libor as a benchmark. 

Less than 10% of foreign banks, global systemically important banks and U.S. regional banks expect to see a change in the deadline for dropping the Libor, although around 15% of foreign banks and G-SIBs wanted some relief on the cessation date. Meanwhile, a third of the U.S. regional banks reported a desire to push back the deadline. 

“While challenging, most of the respondents said they were on pace in terms of operational and technological readiness; a few smaller firms saw the transition timeline as too aggressive to meet,” Sia Partners said 

About 75% of the G-SIBs indicated that they had already engaged in some high-level outreach to clients regarding a dialogue on Libor prior to the pandemic, while almost 50% of foreign banks and less than 20% of smaller, regional U.S. institutions said they started a similar effort. 

“There has been a sustained lack of either motivation or resource commitment by a myriad of client types to invest in their transition process,” Sia Partners said. “Most of the participants had begun planning those efforts, but the market volatility in specific and the various market lending programs offered as temporary relief to bank clients made a dialogue on Libor near impossible.” 

Since the 1980s, the Libor, which reflects the rate major global banks use to lend to one another in the international interbank market for short-term loans, has been a key benchmark interest rate. It has been used to price financial contracts worth about $400 trillion globally. However, in the wake of a 2012 rate-rigging scandal that ultimately led to banks being fined billions of dollars for trying to manipulate the Libor, regulators around the globe have been looking to switch over to alternative overnight risk-free rates as British regulators plan to stop publishing the Libor in 2021. 

Central banks around the world are trying to manage the transition of rates, considering new entries like the U.S.’s Secured Overnight Financing Rate, the U.K.' s Sterling Overnight Index Average and the Euro Short-Term Rate. But with the new market pressures, questions about the ability of banks to meet the 2021 deadline have been raised. In response, regulators have reaffirmed the timeline in the recent months.

The FCA, and the Working Group on Sterling Risk-Free Reference Rates said in a May statement: “The central assumption that firms cannot rely on Libor being published after the end of 2021 has not changed and should remain the target date for all firms to meet. The transition from Libor remains an essential task that will strengthen the global financial system.”

A large majority of the participants in Sia Partners’ survey said legislative relief like a clarification of the replacement rates would help financial institutions keep the transition on track, the report noted.