What is LIBOR?
LIBOR, which stands for the London Interbank Offered Rate, is a benchmark rate that represents the amount banks would pay to borrow from each other on an unsecured basis. To determine the benchmark rate, a panel of banks submits data of what they would pay the other banks for short-term loans (sometimes on a hypothetical basis reflecting estimates and expert judgment). Since the Alternative Reference Rate Committee (ARRC), a financial industry group, has recommended SOFR as the replacement for LIBOR, we are moving forward with this assumption and offering certain products—including residential and commercial mortgages and some commercial loans—using SOFR.
The LIBOR benchmark rate is used to help set the cost of government and corporate bonds, mortgages, student loans, credit cards, derivatives, and other financial products. As LIBOR fluctuates, loan rates can move up or down.
LIBOR is now being phased out
For over 40 years, LIBOR has played a significant role in the worldwide financial services industry. However, an ongoing slowdown in unsecured bank debt market activity has now diluted LIBOR’s relevance. As the volume of this interbank lending has declined, the underlying market that LIBOR strives to measure is no longer sufficiently active to sustain the production of a consistently reliable benchmark over the long term.
As a result, several LIBOR benchmark settings, including the 1- and 2-month U.S. Dollar LIBOR tenors as well as all EUR and CHF LIBOR settings, ceased being published on December 31, 2021. At the direction of the U.K. Financial Conduct Authority (FCA), which oversees LIBOR, LIBOR’s administrator, ICE Benchmark Administration Ltd (IBA), continues to publish several GBP LIBOR settings in a “synthetic” form that does not represent the market those settings were historically designed to measure. The FCA has announced that “synthetic” versions of 1- and 6-month GBP LIBOR will continue to be published through March 31, 2023. The FCA is expected to make future announcements concerning the final date “synthetic” 3-month GBP LIBOR will be published.
With respect to the overnight, 1-month, 3-month, 6-month and 1-year USD LIBOR settings most commonly used in the United States, the FCA and IBA have stated that they will cease being published in their current form after June 30, 2023. The FCA is currently consulting the market regarding “synthetic” USD LIBOR.
In accordance with jointly issued regulatory guidance, banks and other market participants have largely ceased originating new USD LIBOR business and are now using alternative reference rates, including SOFR-based rates. To minimize the risk of disruptions, banks and other market participants also are working to ensure that legacy LIBOR contracts are amended, when necessary, to adequately address what happens when LIBOR is no longer available.
Replacing LIBOR
The Alternative Reference Rate Committee (ARRC), a financial industry group, has recommended using the Secured Overnight Financing Rate (SOFR) as well as CME Term SOFR as alternatives to LIBOR (albeit with certain product-specific limitations). It is important to note that the ARRC was convened by the Federal Reserve Board and the New York Fed specifically to help facilitate the U.S. transition away from LIBOR. Members include a mix of banks, accounting firms, legal firms and other industry representatives.
| Product | Current Index Name | Replacement Index Name |
|---|---|---|
| Adjustable-Rate Mortgage (ARM) | 6 Month U.S. dollar-denonimated deposits in the London market LIBOR, as published by the Wall Street Journal | 6 Month USD IBOR Consumer Cash Fallbacks as published by Refinitiv |
| 1 Year London Interbank Offered Rate LIBOR which is the average of the interbank offered rates for one-year U.S. dollar-denominated deposits in the London market, as published by the Wall Street Journal | 12 Month USD IBOR Consumer Cash Fallbacks as published by Refinitiv | |
| Weekly One-Year USD LIBOR Swap Rate as published by Bloomberg | Weekly One-Year USD SOFR Swap Rate as published by Bloomberg | |
| Home Equity Line of Credit (HELOC) | Weekly Two-Year USD LIBOR Swap Rate as published by Bloomberg | Weekly Two-Year USD SOFR Swap Rate as published by Bloomberg |
We’ll be ready and keep you updated
The transition to a new benchmark following the widespread use of LIBOR in the financial markets is a significant event. To prepare, we are:
- Closely monitoring LIBOR developments and devoting all necessary resources to its transition, with an enterprise-wide initiative to address every opportunity and issue involved
- Working with regulators and industry groups to see how we can tailor their recommendations to our specific client segments
- Providing information and updates as they become available on this page for you
