Life After LIBOR – Are You Ready for the Transition?

Regulators and Board members are already asking where banks are in planning for the LIBOR transition. Fortunately, there is still time but the clock is ticking. With trillions of dollars in financial instruments tied to LIBOR, getting this transition right is extremely important.

One thing we can say with certainty about the role of bank treasurer is that the job that is rarely boring. This is primarily because things are always changing (markets, regulation, products, geo-political, etc.).

Currently, we’re dealing with the impact on markets of an awful global pandemic. A few years ago we had The Great Recession and had to adapt to a deluge of new regulations under Dodd-Frank. Prior to that we had Y2K, the tech bubble, the Russian Debt Crisis, Long-term Capital, the S&L crisis and the list goes on. Some of these events were sudden and unexpected. Others, like Dodd-Frank and Y2K were events where we had some time to plan.

Coming soon is the LIBOR transition. Regulators and Board members are already asking where banks are in planning for the LIBOR transition. Fortunately, we have had some time to plan for this transition but the clock is ticking and the end of 2021 will be here before you know it. With trillions of dollars in financial instruments tied to LIBOR, getting this transition right is extremely important.

1. Are you ready for a post-LIBOR world?

2. Where are you in the LIBOR transition planning process?

In my current role as Senior Advisor to the American Financial Exchange, I have the pleasure of speaking to many bank treasurers, CFO’s and CEO’s. As a former bank treasurer, some of these people are my old peers and some are new acquaintances. I’ve spent some time discussing with these people what they are doing with regard to the LIBOR transition and where they are in the transition process. The following observations may provide some context to help you determine where your bank is relative to other mid-size and small banks regarding the LIBOR transition.

  • Most banks have created LIBOR transition teams, typically made up of senior leaders from finance, treasury, lending divisions, legal, risk management back office and accounting. These transition teams usually report up through ALCO or another risk committee.
  • Most banks have identified the exposure they have to LIBOR beyond 2021.
  • Most banks have adjusted loan documentation to accommodate alternative (possibly multiple) pricing indices.
  • Most banks have discussed their LIBOR transition plans with their boards.
  • Some banks are updating their loan and accounting systems to accommodate alternative indices.
  • Some banks have started communication programs to educate staff on alternative indices and the LIBOR transition in general.
  • Some banks report that more sophisticated customers have been asking about the LIBOR transition while less sophisticated customers will need a lot of education and possibly some hand holding. Some have started reaching out to customers who will likely be impacted.
  • A few banks have begun using alternative benchmarks (such as AMERIBOR) as an index on loans. The feedback from these banks is that it is working well and customers are satisfied.

Hopefully the above points give you an idea of where your LIBOR transition is versus some of your peers. If you have not started a LIBOR transition initiative or have just started doing some of the above, you may be behind the curve. In my opinion, we are at the point where banks should follow the example of early adopters and start booking loans using a LIBOR alternative index. This will motivate your back-office and accounting folks to make sure systems and processes are ready for the coming transition.

In the meantime, take note that the world after Libor will provide many more options to lending institutions than before. One size need not fit all.

Alternative benchmarks will allow capital market participants to have access to a truly representative American rate. All will benefit from increased transparency as benchmarks reflect financing activity in real time. The lending markets will be more diverse, and market efficiency will increase, which will ultimately benefit customers.

Timothy Watson is a senior advisor to the American Financial Exchange, an electronic exchange for direct lending and borrowing for American banks and financial institutions. Previously he was Executive Vice President and Corporate Treasurer of Associated Bank in Green Bay, Wisconsin.

TabbFORUM is an open community that provides a platform for capital markets professionals to share their ideas and thought leadership with their peers. The views and opinions expressed are solely those of the author(s). They do not necessarily reflect the opinions of TABB Group, its analysts, TabbFORUM and its editors, or their employees, affiliates and partners.

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