Ideas & Insights

LIBOR Transition Update

Business 4/1/2021 12:14:19 PM

At Sunflower Bank and First National 1870, we want to ensure that our clients and communities have access to the financial information they need in order to make informed financial decisions. The upcoming discontinuation of LIBOR as an interest rate benchmark has been in the news recently, so we are providing basic information to help explain the upcoming change.

The information below has been provided to the public by the New York Federal Reserve and the Consumer Finance Protection Bureau.

What is LIBOR?

LIBOR (London Interbank Offered Rate) has been the most widely used short-term interest rate benchmark in the world since the 1980s. It is often referenced in derivative, bond and loan documentation, and in adjustable rate consumer lending products such as mortgages and student loans.

Why is LIBOR being discontinued?

LIBOR is based on transactions among banks that don’t occur as often as they did in prior years, making the index less reliable and credible. Across the globe, governments and financial institutions have been working to identify alternatives.1

For the last few years, the derivatives markets, led by the International Swaps & Derivatives Association (ISDA), have been preparing for the discontinuation of LIBOR and other interbank offered rates (IBORs).

What is the impact of transition from LIBOR?

Due to the broad use of USD LIBOR as a reference rate, all financial market participants including retail customers, corporations, issuers, investors, asset managers, service providers of financial products and large financial institutions are impacted.2

In addition, LIBOR is extensively used across a range of business processes (for example, accounting, valuation and financial modeling) across many industries. Therefore many businesses that have exposure to USD LIBOR embedded in their business processes are also likely to be impacted.3

What is replacing LIBOR?

As of April 2021, SOFR (Secured Overnight Financing Rate) is expected to be the replacement for LIBOR on international exchanges. Banks and lenders may select different indices for their loan portfolios according to LIBOR discontinuation protocols.

SOFR is a fully-transaction based, nearly risk-free reference rate according to the ARRC (Alternative Reference Rates Committee), the group responsible for making the alternative recommendation for USD LIBOR. SOFR is an index measuring the cost of borrowing cash overnight collateralized by U.S. Treasury securities. SOFR reflects activity undertaken by diverse types of institutions, including asset managers, banks, corporate treasurers, insurance companies, money market funds, pension funds and more. This market reflects the best available measure of the private sector’s near risk-free rate of borrowing relevant to a wide segment of market participants. 4

What do I need to do?

If you are a business with a commercial loan, you should contact your bank relationship manager to confirm if any terms of your loan agreement include active interest rate transactions that reference LIBOR. All impacted Sunflower Bank and First National 1870 clients have already been contacted with instructions on how to comply with current LIBOR fallback protocols. We are actively monitoring updates provided by the International Swaps and Derivatives Association (ISDA) and ARRC for the LIBOR transition timeline and requirements, and recommend that our clients do the same.

If you have a consumer loan or line of credit with an adjustable rate, your loan contract should list which index is used to calculate your interest rate. If the rate is based on LIBOR, your lender may change to a different index at some point before the anticipated date of LIBOR’s discontinuation.5

References:
1, 3, 5 https://www.consumerfinance.gov/about-us/blog/libor-going-away-heres-what-you-need-know-about-libor-and-adjustable-rate-loans/
 
2, 4 https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Sept-20-2018-FAQ.pdf