NEW YORK (Reuters) – U.S. banks have been slow to offer non-financial firms alternatives to Libor rates for corporate lending, leaving many firms unprepared for the benchmark rate’s coming end and threatening broader liquidity market, an industrial group said on Monday.
Libor, or the London Interbank Offered Rate, has been used to price approximately $ 200 trillion in US financial contracts, from mortgages to derivatives. The rate is removed after banks were fined billions of dollars for colluding to rig the rate. No new Libor contracts will be authorized after December 31, although some existing Libor contracts in US dollars will continue until mid-2023.
Although there has been progress in creating and transitioning to alternative benchmarks set by central banks, the use of Libor for business loans has actually increased over the past two years, said the Alternative Reference Rates Committee (ARRC), an industry group convened by the Federal Reserve.
“With essentially nine months to go until the end of 2021, it is critical that market players actively take steps to support the transition using the tools available now,” said Tom Wipf, ARRC President and Vice President of institutional securities at Morgan Stanley.
The lack of progress in the business lending market was “concerning” as non-financial businesses need time to work with their vendors to ensure their systems will be able to adjust to new rates, a declared the ARRC in a progress report. here.
The delay in providing alternatives to Libor for corporate loans is slowing the overall development of the derivative markets used to hedge loans, as well as the markets that structure and securitize these loans, as liquidity in the cash and cash markets. derivatives are interrelated, said the ARRC.
“Banks and their customers need to be prepared for the transition, and this cannot happen if liquidity is slow to develop in the remaining months,” the report said.
Reporting by John McCrank; Editing by Cynthia Osterman