Log In

Reset Password

The death of Libor

More than a month into the new year, Bermuda’s financial institutions are still considering what to do about replacing Libor, a major component scheduled for retirement at the end of 2021 from its use in the setting of interest rates.

The Bermuda Bankers Association said that individual banks will implement the new reference rate through confidential consultation with the Bermuda Monetary Authority as part of the BMA’s process of prudential supervision.

Association CEO Thomas J. O'Rourke said: “Our primary challenge as an industry will be educating borrowers on the changes in the reference rate and how it will impact the pricing of their respective loan facility.

“When I see constructive industry guidance from official sources like the Federal Reserve I will be posting it to our website and social media.”

For more than four decades until the end of the year, the London Interbank Offered Rate (Libor) was the benchmark banks used for setting interest rates they charged on financial products such as adjustable-rate loans, mortgages and corporate debt.

Mr O'Rourke said the phase-out of Libor is an issue they have tracked through the BBA’s risk sub-committee.

He said: “While final replacement decisions rest with each of the banks and the final phase out for US dollar Libor is not until June 2023, we do see that the Federal Reserve Bank — Secured Overnight Funding Rate (SOFR) is currently the leading replacement rate for the US.

“As the majority of the Bermuda banking sector FX assets are in US dollars, the banks will be looking for regulatory guidance on the transition to SOFR as they move towards the final severance of US dollar Libor.”

Libor was used in a wide range of financial products in every major currency.

But its days were numbered after it featured prominently in a series of banking scandals that go back to the 2007/2008 financial crisis.

Regulatory authorities and public and private sector working groups in several jurisdictions were considering how to support a transition to alternative rates and develop new products referencing them.

HSBC Bank Bermuda has a warning for clients on its website: “The reforms may impact the HSBC products and services you currently use and those we may provide in the future.”

The bank also points out that its website messaging reflects HSBC’s understanding of the reforms as of January 2022 and clients should contact their professional advisers on the possible implications of the changes such as financial, legal, accountancy or tax consequences.

Butterfield Bank’s web notification states that it was using the 2021 transition period to engage with customers, who have credit or loan agreements that incorporate adjustable interest rates and Libor referenced as a benchmark.

The bank stopped issuing credit agreements that use Libor as a sole reference interest rate and was transitioning customers to alternate reference rates. But it conceded that it is an evolving process.

How Libor was determined is part of the reason for its fall from grace.

Eighteen global banks from around the world were each allowed to determine their expected payable rate to a competitor to borrow from them on the interbank lending market in London — not what the rate was, but what each bank claimed it believed the other bank would charge them.

Suitably handicapped, the average would only be determined after the four highest numbers and the four lowest numbers were thrown out.

But individual banks could post any number. It led to scandals and allegations of rate manipulation.

The financial troubles in 2008 were said to be indirectly related, and later, a 2012 Libor investigation found widespread manipulation and collusion.

Thomas J. O'Rourke: CEO, Bermuda Bankers Association (File photograph)

You must be Registered or to post comment or to vote.

Published February 08, 2022 at 7:57 am (Updated February 08, 2022 at 7:52 am)

The death of Libor

What you
Need to
1. For a smooth experience with our commenting system we recommend that you use Internet Explorer 10 or higher, Firefox or Chrome Browsers. Additionally please clear both your browser's cache and cookies - How do I clear my cache and cookies?
2. Please respect the use of this community forum and its users.
3. Any poster that insults, threatens or verbally abuses another member, uses defamatory language, or deliberately disrupts discussions will be banned.
4. Users who violate the Terms of Service or any commenting rules will be banned.
5. Please stay on topic. "Trolling" to incite emotional responses and disrupt conversations will be deleted.
6. To understand further what is and isn't allowed and the actions we may take, please read our Terms of Service
7. To report breaches of the Terms of Service use the flag icon