U.S. Banks Urged to Stop Using Libor on New Loans by End of 2021--Update
November 30 2020 - 12:20PM
Dow Jones News
By Andrew Ackerman
WASHINGTON -- U.S. regulators on Monday pressed banks to stop
using the London interbank offered rate on new transactions by the
end of 2021 while backing a plan to allow many existing
transactions to mature before Libor fully winds down in June
2023.
The moves amount to the strongest and clearest guidance yet from
regulators about the risks to banks for writing new contracts based
on Libor, an interest-rate benchmark that global policy makers
moved to scrap after concluding it was balky and prone to
manipulation.
Entering into new contracts using Libor after 2021 would "create
safety and soundness risks," U.S. regulators warned in a joint
statement, pledging to "examine bank practices accordingly."
At the same time, U.S. officials said they welcomed a plan to
offer an additional 18 months for so-called legacy contracts -- the
roughly $200 trillion of existing interest-rate derivatives and
business loans tied to the rate -- to mature before Libor fully
winds down in June 2023. Previously, U.K. and U.S. policy makers
have said Libor couldn't be guaranteed after 2021.
"These announcements represent critical steps in the effort to
facilitate an orderly wind-down" of dollar-based Libor
transactions, John Williams, President of the Federal Reserve Bank
of New York, said in a statement. "They propose a clear picture of
the future, to help support transition planning over the next year
and beyond."
Regulators estimate that most of the legacy contracts will
mature before June 2023. For the rest, legislation will be needed
to switch benchmarks for contracts that lack a clear-cut fallback
once Libor ceases to exist, senior Fed officials told reporters on
Monday.
"Today's plan ensures that the transition away from Libor will
be orderly and fair for everyone -- market participants,
businesses, and consumers," Fed Vice Chair for Supervision Randal
Quarles said in a statement.
Deeply rooted in markets, Libor was exposed by a 2012 scandal
that led to convictions for some traders and penalties for numerous
banks.
If the transition doesn't go as planned, consumers could end up
on the hook for increased payments on credit-card loans and other
borrowings, while small businesses could face higher fixed rates
for loans.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
(END) Dow Jones Newswires
November 30, 2020 12:05 ET (17:05 GMT)
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