Personal Perspective: What does leaving LIBOR mean to you?


For more than 40 years, the London Interbank Offered Rate, or LIBOR, has been a key benchmark for setting the cost of floating rate debt around the world.

LIBOR also plays an important role in pricing the debt issued by corporate borrowers. Following the 2008 financial crisis, the integrity of LIBOR was called into question due to handling issues. A contraction in the unsecured interbank lending market has also significantly reduced the volume of transactions on which to base the panel’s bank estimates. As LIBOR rates are a less reliable benchmark, regulatory guidelines require banks to cease making new LIBOR loans by the end of 2021 and to transfer existing LIBOR loans to other indices by June 30, 2023 .

To help speed up the transition, the Alternative Reference Rates Committee (ARRC), a group of private market players, has been convened by the Federal Reserve Board and the New York Federal Reserve Bank to seek alternatives to LIBOR. ARRC is leading the transition away from LIBOR and is responsible for publishing recommended best practices to outline activities and milestones in the transition.

Additionally, the International Swaps & Derivatives Association (ISDA) is leading the transition of US dollar LIBOR derivatives markets (eg, interest rate swaps) away from LIBOR. ISDA and ARRC are working closely to confirm alignment of their goals.

In 2017, the ARRC recommended a new risk-free overnight benchmark, the Secured Overnight Financing Rate (SOFR), as a replacement benchmark for transactions in the US bond and loan markets. The New York Federal Reserve now publishes the SOFR daily, as well as SOFR averages and a SOFR index. The Daily Simple SOFR convention, also recommended by the ARRC, calculates and aggregates interest on a daily basis and is used for many types of business loans.

However, the move to SOFR is not without its challenges. Because the daily SOFR reflects overnight borrowing rates, borrowers may dislike it because they are less able to predict payments, and their loans would not reflect expectations of rate changes – one of the main attractions of LIBOR. To address this issue, on July 29, 2021, the ARRC officially recommended the Chicago Mercantile Exchange Group forward looking 1-month, 3-month and 6-month SOFR rates for commercial loans, and the number of SOFR-related products is increasing.

Another problem is that, unlike LIBOR, the new rates do not take into account the credit risk that banks assume when lending. As a result, some market players and industry groups advocate, and in some cases use, an established benchmark such as Prime, or newly created benchmarks such as the American Interbank Offered Rate (AMERIBOR), Bloomberg Short-Term Bank Yield Index (BSBY), or ICE Bank Yield Index (BYI).

While alternatives to SOFR – including credit-sensitive rates – continue to be discussed, most market participants follow ARRC’s recommendation to use SOFR as an alternative benchmark rate. If you have a LIBOR-based adjustable rate loan, find out what index your lender will switch to. If you are considering new variable rate debt, ask your lender about your options. While there may not be definite answers at the moment, keep an eye on the situation. A switch to a different index could potentially mean a change in your base rate in the future.

Doyle is KeyBank’s Commercial Sales Manager in Cleveland.


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