LIBOR Transition Information and FAQ
The London Interbank Offered Rate (LIBOR) has become the most widely used interest-rate benchmark in the world. LIBOR has been determined as vulnerable to interest rate manipulation and several of its maturities will be discontinued at the end of 2021.
Read on to learn more about LIBOR, this transition and steps Bankers Trust is taking to prepare. For more information, click here or speak with your lender.
What is LIBOR?
The London Interbank Offered Rate (LIBOR) is an unsecured interbank borrowing rate that has become the most widely used interest-rate benchmark in the world. Reference rates are used in a variety of financial products, including loans, floating rate notes, derivatives and securitizations. LIBOR relies on member banks to accurately report the interest rates they would have to pay to borrow from each other.
LIBOR is based on five currencies—the U.S. Dollar, European Euro, British Pound Sterling, Japanese Yen and Swiss Franc—and it spans seven different maturities: overnight/spot next, one-week, one-month, two-month, three-month, six-month and twelve-month.
Why are financial institutions transitioning away from LIBOR?
LIBOR has been determined as vulnerable to interest rate manipulation, which is why the UK Financial Conduct Authority announced that after December 2021, member banks would no longer need to report their rates to calculate LIBOR. As a result, banks must transition away from using LIBOR and address existing products that rely on it.
What is the timeline of the transition away from LIBOR?
Here are three key dates for Bankers Trust:
- July 1, 2021: No new Bankers Trust transaction will rely on LIBOR.
- June 30, 2022: All existing transactions relying upon LIBOR entered before November 2019 with maturities extending beyond June 30, 2022 and all SWAP transactions relying upon LIBOR entered before January 1, 2021 with maturities extending beyond June 30, 2023, will be modified to include language that either allows the bank to choose a replacement index and adjust the spread at a later date, or uses WSJ Prime as the index rate.
- June 30, 2023: All loans must shift to a replacement index, as LIBOR will no longer be published.
What will replace LIBOR?
There are many alternative variable rate options. For the time being, Bankers Trust will transition to Wall Street Journal Prime. Wall Street Journal Prime is the rate 70% of the largest U.S. banks extend to their prime customers for short-term credits.
However, Bankers Trust will also continue to monitor the Secured Overnight Financing Rate (SOFR), the rate the Alternative Reference Rates Committee recommends financial institutions consider using in place of LIBOR. The number of SOFR-linked products is growing, and Bankers Trust will monitor to determine whether we might transition to SOFR as the new benchmark for loan transactions down the road. SOFR is a transaction-based interest rate which represents the cost of borrowing cash (U.S. Dollars) overnight on a secured basis.
How will this transition impact customers?
Bankers Trust is proactively working on efforts to transition away from LIBOR and to ensure a seamless experience for our customers. Our lenders will work to modify existing transactions that use LIBOR. If your documents need updating, your lender will contact you directly to sign the necessary modification documentation. You will not be charged for the modification. The resulting interest rate will mirror LIBOR as closely as possible, but may result in a slightly different rate. There simply is no perfect substitution.
Beginning July 1, 2021, Bankers Trust lenders will no longer issue products linked to LIBOR.
Which customers will be impacted?
This transition will only impact Commercial borrowers whose loans calculate interest based upon LIBOR.
Is there any action I need to take at this time?
No, customers do not need to take any action at this time. If your documents need updating, your lender will contact you directly to sign the necessary modification documentation.
Is COVID-19 impacting the transition away from LIBOR?
No, the pandemic has not impacted the timeline for the transition away from LIBOR. In fact, the direct correlation between LIBOR and banks’ overall borrowing costs weakened during the pandemic, with volatility leading banks to scarcely rely on LIBOR markets for funding.
This situation is fluid and continues to change. We will post updates as necessary.