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Banks Hesitant to Shift from LIBOR, Dawdling Over FASB Rate Reform Rules

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

Banks and other financial institutions are still hesitant over transitioning old existing contracts away from the London Interbank Offered Rate (LIBOR), which expires in two years, and many are holding off until the very last minute, according to recent FASB discussions with an advisory panel.

There has been little move therefore to take advantage of Topic 848, Reference Rate Reform, which was issued about a year and a half ago by the FASB to facilitate the effects of rate reform.

“In our space, my team has not changed any existing agreements, they’re holding off until the last minute,” Kim Keenoy, senior vice president at Bank of America Merrill Lynch, said during September 14, 2021, discussions of the FASB’s Not-for-Profit Advisory Committee (NAC).

The discussion comes at a time when regulators have been pushing lending institutions to stop using LIBOR at the end of December this year, though its expiration date is set for June 2023.

“From a client perspective, people are really hesitant to get out of the LIBOR, that’s just what we’re used to – it’s kind of a new area and everyone doesn’t really understand how it’s going to impact so they’re trying to push it as much as they can,” said Keenoy. “Some quickly did some credit facilities only for a year or two then in the window before it ceased to be used but we’re seeing banks going different routes,” she said.

Asked by FASB member Christine Botosan whether there’s fallback language in a lot of the existing contracts “where it will just revert to something else automatically and so you don’t have to get into renegotiation,” Keenoy said “Yes.”

“There’s hardwire fallback language in our agreements, that the alternative regulatory committee publishes that we and our attorneys look through,” she said.

For new contracts, some financial institutions have already stopped using LIBOR as of June 30, and have moved to the Bloomberg Short-Term Bank Yield Index (BSBY), or the Secured Overnight Financing Rate (SOFR), the NAC discussions also indicated.

“Our preferred rate at our firm is BSBY, which is the Bloomberg Rate. If you look at the historical numbers it definitely ties much closer to LIBOR than SOFR – SOFR’s still out there, obviously a lot of banks are looking at that as well,” Keenoy said. “…We have successfully closed some BSBY loans and it’s an unsecured rate so it definitely mirrors LIBOR if you look back three or four years and that’s what we send out to our clients, but like you said it’s evolving – a lot of clients are uncertain as to what they should do, they’re relying on advisers, and consultants and auditors to help them,” she said. “All we’re doing is providing as much education that we know about the different rates. Our preferred rate is BSBY.”

There are trillions of dollars of loans, derivatives, and financial contracts that are tied to LIBOR. Some regulators have cautioned that BSBY has many of the same flaws as LIBOR as both benchmarks are based upon unsecured, term, bank-to-bank lending. They have expressed preference for SOFR as an alternative to LIBOR.

The discontinuation of LIBOR was announced in July 2017, after bankers at a number of financial institutions moved to manipulate LIBOR to make profit. The scheme came to light in 2012. LIBOR, a daily calculation, is supposed to purport interest rate figures that banks pay to borrow money from each other. It is also used by banks to determine what rates to charge on various types of loans.

 

This article originally appeared in the September 21, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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