ABA Banking Journal
No Result
View All Result
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive
SUBSCRIBE
ABA Banking Journal
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive
No Result
View All Result
No Result
View All Result
ADVERTISEMENT
Home Commercial Lending

Post-Libor, Banks Benefit from More Choice

March 30, 2022
Reading Time: 3 mins read
A Risk Manager’s Guide to the Reference Rate Transition

By Richard Sandor

The most influential and discredited number in modern finance began its disappearing act from the global capital markets at the end of December 2021. Given Libor’s dominant role as an interest rate benchmark since the 1970s, the fact there was little disruption speaks volumes about the resiliency and innovation taking place in our financial system.

There are still issues that need to be addressed, though, such as legacy contracts tied to Libor that lack fallback language for alternative benchmarks. But in general banks and other financial services firms have been preparing for the change for years and most certainly will benefit from multiple benchmarks to choose from.

For example, Brookline Bancorp started planning for this eventuality in earnest three to five years ago. As a midsize commercial bank in eastern Massachusetts and Rhode Island, Brookline had approximately $2 billion of its loan portfolio tied to Libor across 500 different relationships—roughly 20 percent of its loan book, with further typical exposure across borrowings, deposits, capital and other banking activities. The build-up for the transition has been similar to the preparation for Y2K, which required extensive planning and cross-department teamwork to avoid any business disruption for customers and the bank.

Choice of benchmarks is essential to the successful transition from Libor. “A banking industry that is so varied, so complex and so essential to the American economy needs the diversity and durability that comes from choice in interest rate benchmarks,” former Commodity and Futures Trading Commission Chairman Christopher Giancarlo testified in November before the Senate Banking Committee. “A one-size-fits-all response to the demise of Libor would be a source of systemic risk to the U.S. economy. As we rightfully move away from Libor, we should make clear that lending institutions—be they money center banks or local, regional or MDI banks—should have the flexibility to choose among International Organization of Securities Commissions-compliant benchmark alternatives that best meet both their lending activity and their customers’ needs.”

Midsize banks have gone on the record saying that a credit component in an index is important to their institutions because their funding is generally unsecured, which includes some term and some overnight transactions. A benchmark based on unsecured, multilateral lending activity—like Ameribor, which is published by the American Financial Exchange, which I founded—better represents the nature of cost of funds, whether it is in the deposit market, the cash market or issuing subordinated debt. They added that using Ameribor as an index for lending minimizes the mismatch with the bank’s funding base.

Choosing an alternative to Libor for new production and legacy contracts is about aligning customer’s needs and the institution’s needs, along with market conventions. With more choice, banks are able to meet all the different constituent counterparties’ requirements.

A plug-and-play alternative to Libor is easy for bankers to understand and explain to bank customers on the regional and community bank level. These are the businesses that drive the U.S. economy and deserve choice in borrowing options.

Having choice among multiple qualified benchmarks will facilitate the transition away from Libor, enhance efficiency and reduce systemic risk. The Secured Overnight Financing Rate has an important place in the efficient functioning of the repo market, on which SOFR is based, especially in times of record deficit and debt levels. But for many smaller banks, having a credit-sensitive component that reflects their cost of borrowing is a matter of survival. They need a rate that reflects their credit risk, which is higher than the bigger banks.

Richard L. Sandor is the Aaron Director Lecturer in law and economics at the University of Chicago Law School. He is also chair and CEO of the American Financial Exchange, an electronic exchange for direct interbank/financial institution lending and borrowing that publishes the Ameribor rate.

ADVERTISEMENT
Tags: LiborReference rates
ShareTweetPin

Related Posts

A Risk Manager’s Guide to the Reference Rate Transition

Credit-sensitive Libor replacements still seek traction

Commercial Lending
June 16, 2025

Looming volatility and recent developments may give AXI and Ameribor a boost

ABA, associations urge lawmakers to finalize deal on debt ceiling

House passes ABA-backed CEASE Act

Commercial Lending
June 5, 2025

The House voted in favor of a bill to cap the number of for-profit small-business lending companies eligible to make loans under the Small Business Administration’s 7(a) Program.

Did you know that the federal government is a major source of bank balance sheet volatility?

Commercial Lending
May 15, 2025

How tax payments and entitlement spending make balance sheet management trickier.

Podcast: Accelerating banking for quick-service restaurants

Podcast: Accelerating banking for quick-service restaurants

ABA Banking Journal Podcast
May 8, 2025

As independently owned and operated small businesses, fast-food restaurant franchisees have unique business needs. They have mobile and often part-time workforces, complex inventory management and the constant challenge of managing both a small business and being the face...

Survey finds small-business lending fraud on rise

How a Georgia community bank supports government-guaranteed lending nationwide

ABA Banking Journal Podcast
May 1, 2025

Government-guaranteed lending requires special expertise and back-office functionality that grows increasingly expensive for smaller banks.

CFPB launches ‘tip line’ to report on bureau employees

CFPB to ‘deprioritize’ small-business lending data collection enforcement

Commercial Lending
May 1, 2025

The CFPB will not prioritize enforcement of its Section 1071 small-business lending data collection rule for businesses not covered by a recent court-ordered stay.

NEWSBYTES

Banking agencies seek public comment on strategies to combat payments fraud

June 16, 2025

ABA urges CFPB to preserve streamlined mortgage relief option

June 16, 2025

Illinois pushes back implementation date for state interchange fee law

June 16, 2025

SPONSORED CONTENT

AI Compliance and Regulation: What Financial Institutions Need to Know

Unlocking Deposit Growth: How Financial Institutions Can Activate Data for Precision Cross-Sell

June 1, 2025
Choosing the Right Account Opening Platform: 10 Key Considerations for Long-Term Success

Choosing the Right Account Opening Platform: 10 Key Considerations for Long-Term Success

April 25, 2025
Outsourcing: Getting to Go/No-Go

Outsourcing: Getting to Go/No-Go

April 5, 2025
Six Payments Trends Driving the Future of Transactions

Six Payments Trends Driving the Future of Transactions

March 15, 2025

PODCASTS

Podcast: Old National’s Jim Ryan on the things that really matter

June 12, 2025

Podcast: What bankers need to know about ‘First Amendment audits’

June 5, 2025

Podcast: Accelerating banking for quick-service restaurants

May 8, 2025
ADVERTISEMENT

American Bankers Association
1333 New Hampshire Ave NW
Washington, DC 20036
1-800-BANKERS (800-226-5377)
www.aba.com
About ABA
Privacy Policy
Contact ABA

ABA Banking Journal
About ABA Banking Journal
Media Kit
Advertising
Subscribe

© 2025 American Bankers Association. All rights reserved.

No Result
View All Result
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive

© 2025 American Bankers Association. All rights reserved.