Even with certain U.S. dollar tenors of the London Interbank Offered Rate set to cease publishing as soon as the end of 2021, the volume of financial instruments that reference USD Libor has grown to $223 trillion, up from $199 trillion in 2016, according to the Alternative Reference Rates Committee. “Most of this increase again comes from derivatives exposures, but the estimated amount of business loans referencing USD Libor has also increased,” the ARRC said in its latest transition progress report issued today.
Of the $223 trillion, $90 trillion will mature after June 2023, when the remaining tenors of USD Libor will cease publishing—resulting in legacy contracts that must be revised to deal with the cessation. “Some of these contracts should already have workable fallback language, but many still have no effective means to replace Libor upon its cessation,” Federal Reserve Vice Chairman for Supervision Randal Quarles noted in a speech today. The ARRC added that 55% of the $2 trillion in outstanding Libor-benchmarked syndicated loans will mature after June 2023, as will 31% of the $1.3 trillion in non-syndicated business loans, 53% of the $1.5 trillion in non-syndicated commercial mortgages and 61% of the $1.3 trillion in retail mortgages referencing Libor, based on historic prepayment rates.
The ARRC raised concerns about a lack of progress in transitioning business loans, noting that borrowers need to be prepared to accommodate new rates and that they may wish to transition more gradually, “which cannot occur if lenders do not offer alternatives soon.” Borrowers also wish to be “offered a range of [Secured Overnight Financing Rate] alternatives,” the ARRC said, adding that “delay in offering alternatives to Libor in the business loans market slows overall market development in the derivatives markets that may be required to hedge these loans.”
Meanwhile, in his speech, Quarles outlined what supervised institutions should expect as examiners review their post-Libor transition plans, financial exposures, risk assessments, operational preparedness, contract readiness, customer and counterparty communication and oversight by boards and management. “Market participants have had many years to prepare for the end of Libor, yet over the last few years they have actually increased use of Libor,” he said. “The firms we supervise should be aware of the intense supervisory focus we are placing on their transition, and especially on their plans to end issuance of new contracts by year-end.”
