The LIBOR Phase-Out and What It Means For You
LIBOR, or the London Interbank Offered Rate, is a benchmark index rate used by banks to set interest rates for variable- and adjustable-rate loans, among other financial products. A LIBOR phase-out for one-week and two-month U.S. dollar (USD) LIBOR rates is expected by the end of 2021, with a complete phase-out to be undertaken by June 2023.
How is LIBOR calculated?
Intercontinental Exchange (ICE), the administrator of LIBOR, asks a select group of global banks about interest rates they expect to receive when borrowing from other banks. The group then sends their interest rate estimates to ICE for five currencies – U.S. dollar (USD), Euro (EUR), Pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF) – and seven maturities. Based on these figures, ICE calculates and publishes 35 different LIBOR rates daily.
Why is LIBOR being phased out?
After the 2008 Financial Crisis, interbank lending and borrowing began to decline as banks looked for other means to obtain financing. In addition, due to the inaccurate reporting of interest rates by some banks to ICE, LIBOR became vulnerable to rate manipulation and eroding credibility.
For these reasons and more, the Financial Conduct Authority (FCA), which regulates LIBOR, will phase out LIBOR for one-week and two-month USD LIBOR rates by the end of 2021, and for remaining LIBOR rates by June 2023.
In the short term, the LIBOR phase-out will impact rates of existing LIBOR-based financial products such as loans and deposits. The global financial industry is currently working towards establishing an alternate benchmark in place of LIBOR. For dollar-denominated loans, the Security Overnight Financing Rate (SOFR) is likely to serve as the new replacement index for USD LIBOR rates.
What the LIBOR phase-out means for Popular Bank customers.
The lending rates for many of our loans are based on LIBOR. If you’ve recently taken out a loan with us, your interest rate may have been based on the LIBOR benchmark. However, given the LIBOR phase-out, the benchmark for the interest rate of your loan will change in the future.
Your loan documents may already provide you with another reference interest rate in the event of a LIBOR phase-out. If they do not, we will need to work together and take certain steps to ensure that your loan reflects an updated and accurate replacement rate.
Your next steps as a borrower.
Carefully review all documents that came with your loan. If your loan’s interest rate is based on LIBOR and you have any questions for Popular Bank, connect with a Popular Relationship Manager. We’ll be happy to help you transition to the replacement interest rate for your loan so that you can avoid any rate disruptions during the LIBOR phase-out.