Bracing for Impact: What’s Complicating the Push to End Libor

By July 30, 2020 14:35

Bracing for Impact: What’s Complicating the Push to End Libor

When the COVID-19 market panic deepened in March, the Federal Reserve put together a $600 billion Main Street lending program to help small- and medium-sized businesses cope as the U.S. economy was tumbling into recession. But there was a wrinkle. Initially, the loans were set to be priced off a new interest rate, SOFR, to help the market transition away from the scandal-hit London Interbank Offered Rate (LIBOR). Then, it turned out the loans had to be tied to LIBOR after all because lenders told the Fed they were not ready to issue loans in SOFR, or the Secured Overnight Financing Rate. The issue brought back familiar fears about the push to end LIBOR, the world’s most commonly used interest-rate benchmark, by the end of 2021, and since then new worries have surfaced that are heaping fresh uncertainty on the roughly $400 trillion worth of financial contracts linked to it. First-quarter volatility related to COVID-19 also highlighted how different benchmarks react to market selloffs. LIBOR surged as the cost of obtaining credit from banks rose, while SOFR rates fell because they track overnight loans based on U.S. Treasuries that remain in high demand, as well as base rates that the Fed cut to near zero during the March meltdown. These recent episodes are underscoring yet again the enormous difficulty of moving away from LIBOR in favor of new, robust reference rates and also highlighting how tricky it is to embrace the alternatives. Industry efforts are helping generate clarity and coordinated action in certain areas, but significant challenges remain that will need more focus and attention. The transition is further complicated by the fact so many financial market professionals are working in isolation during the pandemic. Some firms are addressing more urgent tasks as the health crisis has evolved into a make-or-break financial strain on their businesses.

By July 30, 2020 14:35


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July 2020