Many US regional, community banks lagging on Libor switch to SOFR, consultants say

06 Aug 2020 9:02 pm by Neil Roland

finance

Many regional and community banks, as well as a large bank or two, are lagging far behind where they should be in switching from the Libor benchmark to the Secured Overnight Financing Rate, bank consultants said.

“SOFR derivative volumes are low, lending volumes are low, mortgage volumes are non-existent at this point,” Adam Schneider, a partner at Oliver Wyman management consultants, said in an interview following a presentation this week. “Where’s the SOFR lending?”

“Libor issuance today is about the level it was two years ago," Schneider said at a virtual session* sponsored by a US Federal Reserve-sponsored panel. "That’s a shame.”

“You’re issuing a product that will go away in 17 months,” he added. “You would not be selling a toaster that went bad in 17 months.”

Schneider, who has consulted on Libor with dozens of banks, said there's still time for banks to revamp their systems — even as they struggle with the pandemic, which has set back their transition efforts.

Roy Choudhury, a Boston Consulting Group managing director who spoke at the same session as Schneider, pinpointed banks with around $100 billion in assets as being particularly slow in making the switch.

“There’s still a lot of work to be done among that group,” he said at the virtual session. But, he added, “there’s been an incredible amount of progress, especially around derivatives.”

The UK’s Financial Conduct Authority, which oversees Libor, has said it will stop guaranteeing support for the tarnished benchmark on Dec. 31, 2021. In the US, the Fed-sponsored Alternative Reference Rates Committee, or ARRC, is pushing for a transition to SOFR by that deadline.

Derivatives

Schneider, who sits on ARRC, agreed that he's far less concerned about banks’ efforts on derivatives than on a cross-section of loans and debts. The International Swaps and Derivatives Association, an industry group, is very capably handling the transition for derivatives, which account for about 90 percent of Libor exposure. he said.

But with regard to loans and debt issuance, banks should be especially focused on either switching entirely to SOFR or inserting fallbacks to Libor in contracts that reference the scandal-plagued benchmark, Schneider said.
These fallbacks are intended to give both parties a clear alternative if Libor suddenly collapses or is scrapped.
“That’s the area that I worry about substantially now,” Schneider said. Referring to fallbacks, he said, “They’re a giant can of worms.”

Banks have little clarity about the fallbacks and how they will work on a number of kinds of debt, he said. Contracts without clear fallbacks could easily wind up in court with challenges by either side of a transaction.

*“Approaching the Transition,” Alternative Reference Rates Committee; Aug. 3, 2020.

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