Libor transition: Between a rock and a hard place
Banks are caught in the middle of regulatory pressure from above and corporate inertia from below when it comes to transitioning away from Libor, but they are the lynchpin on which the whole process depends.
As if they didn’t have enough to deal with, banks are faced with a succession of serious challenges over the next two years as they face up to the reality of the end of Libor.
Firstly, they must figure out their exact exposure to the expiring benchmark with every client that they have – an eye watering task – and establish how to manage the situation. Secondly, they have to figure out how best to approach new lending based on new benchmarks. Thirdly they have to assess the impact on their own funding and capital structure. All in a little over 24 months.
The first challenge is enormous. Banks have vast books of legacy lending against Libor, much of which is long-term. Euromoney approached several banks for this article, none of which were prepared to speak to us about how things are going.
“There is a perfectly sensible job to be done to move the market onto new rates, but sorting out the legacy is impossible,” declares Benedict James, a partner at law firm Linklaters in London who specializes in advising financial institutions on the prudential and structural regulatory landscape.