Libor and Covid-19: Risk-free rates no more

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The transition from Libor must be delayed to avoid pressuring coronavirus-damaged markets.


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Remember Libor transition? In the chaos of the last month the topic that has, or should have been, top of mind at many banks has been overrun by the panic and dislocation that the spread of Covid-19 has wrought in the capital markets.

Most bankers, now fighting fires on all fronts, would dearly love to be able to park this issue for the foreseeable future while they try to deal with the impact of a sudden global economic stop on their clients’ and their own businesses.

But it is not to be.

In a statement on March 25, the Financial Conduct Authority, the Bank of England and the Working Group on Risk Free Reference Rates confirmed that “the central assumption that firms cannot rely on Libor being published after the end of 2021 has not changed.”

Given that this deadline was already viewed by the market as challenging but not impossible, sticking to it in the current circumstances seems delusional and suggests that, like the UK government at the start of the year, UK regulators are still in denial about the impact of the virus.


The regulators need to find an international solution that can take the pressure off this transition 
 - Marcus Morton, Duff & Phelps

The statement did concede, however, that the worst global slump since the Great Depression was having “an impact on the timing of some aspects of the transition programmes of many firms.”

The statement is probably just a placeholder while the regulators come up with a more concrete strategy.

They have always been vocal in insisting that the deadline will not budge to get market participants moving. Many of the toughest parts of the business to transition, however, are now at the heart of the current crisis.

Are banks really expected to keep large numbers of staff in loan departments working on Libor transition rather than deploying them to provide urgently needed assistance to clients now in distress due to the global lockdown?

“The regulators need to find an international solution that can take the pressure off this transition,” says Marcus Morton, managing director, valuation services at Duff & Phelps in London. “They need to firm up guidance so that banks are able to deploy staff onto the most critical roles in addressing the broader impact of the Covid-19 crisis on the economy.”

Guidance

Regulators need to come up with unified, international guidance on how to proceed – and they must do it fast.

“If this gets de-prioritized to the point where we get to September and nothing further has been done, then we face a real problem,” Morton says. “It needs to stay on the radar so that it doesn’t get too late to do anything.”

The transition away from Libor has always been a project fraught with difficulty and risk because of the volumes of capital markets instruments that will be affected. There is certainly risk involved for banks still submitting, but it is less than would be involved in pushing the capital markets over a cliff that they have not been able to properly prepare for.

To press on with this transition – the deadline for which was always ambitious – seems reckless in the extreme.