LIBOR Transition Update
In July 2017, regulators decided they would phase out LIBOR, The London Interbank Offered Rate, as an interest rate index by the end of 2021. More recently, on March 5, 2021, the Financial Conduct Authority (FCA) formally announced the future ceasing of and loss of representativeness of LIBOR. This announcement is in line with the anticipated timing for the LIBOR transition. As it relates to overnight, 1-month, 3-month, 6-month and 12-month LIBOR:
- LIBOR will continue to be published and applicable for use in active contracts through June 30, 2023
- LIBOR will no longer be representative after June 30, 2023
In response to these updates, Frost Bank has decided that our commercial loans will transition to the bank’s preferred replacement index, AMERIBOR, a benchmark developed by the American Financial Exchange. The timing and manner in which each customer’s contract transitions will vary on a case-by-case basis. Frost is proactively planning to complete the transition in early 2022. We will continue to update this page as new announcements are made public.
Investments may be impacted if LIBOR is used as or to determine the benchmark rate for that investment. Each investment or security that references LIBOR is a contract with its own terms. The prospectus, offering document or governing agreement for each investment should describe the investment’s benchmark rate, and if it is LIBOR, how a replacement rate will be determined. If there is no plan for a replacement rate, the issuer and holders of impacted investments will determine the transition plan for the investment.
LIBOR Transition Q&A
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).
With the impending phase-out of LIBOR, Frost Bank has decided commercial loans that reference LIBOR will transition to AMERIBOR. Frost believes AMERIBOR is a great fit for us and our borrowers. Unlike LIBOR, AMERIBOR is a transaction-based overnight rate, representative of actual lending rates between U.S. regional banks of our size, making AMERIBOR more reflective of how we can borrow money.
What is the timing for this transition?
Transition timing can be very deal specific, driven heavily by the unique language within the loan documents of each deal. However, regulatory guidelines provide a framework that every deal must live within.
On November 30, 2020, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency provided guidance that issuing new LIBOR contracts after December 31, 2021 could present safety and soundness risks to banks.
Therefore, new transactions may not use LIBOR after 2021, and most existing transactions must be amended to transition to an alternative on or before July 1, 2023.
What is Frost doing for commercial customers today in anticipation of the LIBOR transition?
Frost has been working on the transition from LIBOR since late 2017. Relationship Managers have already reached out to Frost customers who will be affected by the transition to identify the next step in their financial journey. It’s also important to note that not every Frost Bank customer has direct LIBOR exposure.
Will every Frost commercial customer have the same transition experience?
Frost Bank Relationship Managers will work closely with customers to help them navigate the LIBOR transition. Each customer will receive individual attention and the exceptional service you can expect from Frost. Our RMs will address each customer’s LIBOR transition on a case-by-case basis to identify a solution that works best for their financial situation. Frost will take a hands-on approach to the LIBOR transition, proactively updating customers when there is news to share.
Still Have Questions?
If you have any further questions or would like additional information concerning the replacement of LIBOR, please contact your Relationship Manager or Wealth Advisor and refer to this website for future updates.
- Transitioning from LIBOR
- AMERIBOR® Factsheet
- Frequently Asked Questions
- American Interbank Offered Rate AMERIBOR
- FCA’s March 5th Pre-Cessation Announcement
- The Future of LIBOR
- Alternative Reference Rates Committee
- International Organization of Securities Commissions
- Secured Overnight Financing Rate