Slow shift from Libor for U.S. business loans 'concerning' -industry group
22/03/2021 18:44
By John McCrank
NEW YORK, March 22 (Reuters) - U.S. banks have been slow to
offer non-financial firms alternatives to Libor rates for
business loans, leaving many companies unprepared for the
upcoming end of the benchmark rate and threatening broader
market liquidity, an industry group said on Monday.
Libor, or the London Interbank Offered Rate, has been used
to price around $200 trillion of U.S. financial contracts, from
mortgages to derivatives. The rate is being scrapped after banks
were fined billions for colluding to rig the rate. No new Libor
contracts will be allowed after Dec. 31, though certain existing
U.S. dollar Libor contracts will continue until mid-2023.
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While there has been progress in creating and transitioning
to alternative reference rates set by central banks, the use of
Libor for business loans has actually increased over the past
couple of years, said the Alternative Reference Rates Committee
(ARRC), an industry group convened by the Federal Reserve.
"With essentially nine months left to end-2021, it is
critical that market participants are actively taking steps to
support the transition using the tools available now," said Tom
Wipf, ARRC Chairman and Vice Chairman of Institutional
Securities at Morgan Stanley MS.N .
The lack of progress in the business loans market was
"concerning," because non-financial businesses need time to work
with their vendors to be sure their systems will be able to
accommodate new rates, ARRC said in a progress report https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf.
The delay in offering alternatives to Libor for business
loans slows overall development in the derivatives markets used
to hedge the loans, as well as in the markets that structure and
securitize those loans, as liquidity in the cash and derivatives
markets are interrelated, ARRC said.
"Banks and their customers need to be prepared for the
transition, and this cannot occur if liquidity is slow to
develop over the remaining months," the report said.
(Reporting by John McCrank; Editing by Cynthia Osterman)
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