Life after Libor: Who’s ready and who’s not?
The transition of most of the global financial markets away from Libor and the adoption of risk-free rates is finally upon us. As the clock counts down to the demise of Libor for all new contracts, the focus is firmly on where the sticking points remain: the ‘tough legacy contracts’ and the US dollar loan market.
When a small group of US bankers sat down a few years ago with Steve Mnuchin, they had a simple message for president Donald Trump’s Treasury secretary. A push was emerging for US lenders to adopt a new risk-free benchmark, the Secured Overnight Financing Rate (Sofr), in place of the London Interbank Offered Rate (Libor), which was slated to be scrapped, and the bankers believed this was a mistake.
Sofr, a measure of the cost of overnight borrowing against Treasuries in the repo market, would not reflect lenders’ real funding costs, the bankers pointed out. Borrowing would only get more expensive as a result, which would hurt the US economy. This was not lobbying by the great and the good of Wall Street: these were regional and community banks, the lifeblood of local economies across the nation.
Years later, the industry is facing a deadline that it has been working towards ever since.