As we have all heard, the London Interbank Offered Rate (LIBOR) will stop being published at the end of December 2021, with US LIBOR tenors to stop being published in June of 2023. As a result, it is important for organizations to consider the impact on their overall operations. There was hope that LIBOR would continue due to COVID-19, however that doesn’t appear to be the case.
Some believe the switch to the PRIME rate may be the easiest course of action. While on the surface this may appear to be the easiest course of action, there are potential consequences with the use of the PRIME rate. For instance, the PRIME rate may be higher than other rates. While easily determinable, it is subject to various economic factors and may rise or fall over time depending on the current state of the economy.
Where do we go from here?
One of the largest issues with LIBOR for financial institutions to consider is the impact by regulators. Regulators have increased their level of scrutiny on financial institutions still utilizing LIBOR. By not moving away from LIBOR, financial institutions run the risk of being criticized as part of their safe and soundness review when they are performed.
Although this may seem daunting, there is potential good news for financial institutions. In several instances, the impact of moving away from LIBOR has not been significant because many loan agreements already include clauses that allow for the substitution of a new interest rate.
Financial institutions should begin to communicate with clients their overall position and how they believe they have addressed the elimination of LIBOR. Open communication will ensure financial institution clients are prepared for the change and are able to adjust their debt payment, if applicable due to a new rate being utilized.
What you can start doing now?
Financial institutions should perform an internal review to ensure they are ready for future inspections. Additionally, open communication with financial institution clients is also imperative to ensure a smooth transition away from LIBOR.
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