What is LIBOR?
The London Interbank Offered Rate (LIBOR) is an interest rate index. Leading banks periodically report how much it would cost them to borrow in U.S. dollars from another bank on an unsecured, short-term basis, and this information is used to determine the index. Each bank’s reported borrowing cost does not have to be based on actual borrowing transactions and may be estimated within defined parameters. LIBOR is often described as the world’s most important interest rate index. An estimated $200 trillion in derivatives, variable rate mortgages, auto loans, commercial loans, credit cards, and other financial products are tied to LIBOR interest rates.
What’s the future of LIBOR?
In July 2017, British regulators, who have primary responsibility for supervising LIBOR, announced that they wanted to phase out LIBOR by the end of 2021. The stated goal is to transition from LIBOR to a new interest rate index that is based primarily (if not exclusively) on actual borrowing transactions. The U.S. Federal Reserve System, the U.S. Commodity Futures Trading Commission, and a host of other U.S. banking and global financial regulators have voiced strong support for a transition away from LIBOR. As a result, financial markets are under an approaching deadline to replace LIBOR.
What will Replace LIBOR?
Industry groups and regulators have proposed a number of alternative benchmarks to replace LIBOR. The Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York established the Alternative Reference Rates Committee (ARRC) to identify a preferred alternative to LIBOR. The ARRC’s membership represents the very largest financial institutions. Regulators and certain industry groups also participate in the ARRC’s activity. The ARRC has identified the Secured Overnight Financing Rate (SOFR) as its chosen successor to LIBOR and established a transition plan. The Federal Reserve Bank of New York began publishing the SOFR rate in April 2018.
Some constituencies have objected to a transition to SOFR and have proposed different replacement benchmarks for LIBOR, such as Ameribor (supported by the AFX exchange and a large number of regional and community banks) and the ICE Bank Yield Index (supported by the current administrator of LIBOR). Frost has not made a final decision regarding its LIBOR replacement.
What is Frost doing today in anticipation of the LIBOR transition?
Frost has been working on transition from LIBOR since late 2017. As the migration away from LIBOR presents a number of risks to both creditors and borrowers, we will continue to monitor the situation and may provide you with updates as new information becomes available. If you have any questions or would like additional information concerning the replacement of LIBOR, please contact your Relationship Manager and refer to this website for future updates.
- The Future of LIBOR
- Alternative Reference Rates Committee
- International Organization of Securities Commissions
- Secured Overnight Financing Rate