Pub. 10 2020 Issue 4

18 www.azbankers.org T HE 1980S WERE A MUCH DIFFERENT time than today. Many of us remember or are too young to remember an age where the typical computer only had 64 kilobytes of memory or where cell phones weighed as much as 20 pounds; no one anticipated we would ever call them smart any time soon. The 1980s were also a period of change for global economics and banks. In 1986, the London Interbank Offering Rate (LIBOR) was officially introduced and published as an interest rate benchmark for widespread usage by financial and non-financial firms in response to banks trading in new inter - est markets. However, over three decades later, after determining that LIBOR was vulnerable to interest rate manipulation, it was announced that the benchmark rate would be discontinued beginning Dec. 31, 2021. This discontinuation meant that many businesses, banks included, would have to take the arduous tran - sition away from using LIBOR in the future and address existing products that already use it. Under normal circumstances, 2020 was supposed to be a significant year in the transition away from LIBOR. However, the financial impact of the COVID-19 pandem - ic may have caused a shift in priorities for many banks. While regulators have provid - ed a temporary reprieve in several banking areas for this year, it still stands today that LIBOR will no longer be here after 2021. To underscore the crucial need to address this issue by that deadline, the Financial Secu - rity Board (FSB) published a 2020 Progress report on the year of transition away from LIBOR. As the transition remains a global priority, the FSB also included a roadmap of milestones that banks should follow to navigate this process in a timely manner. The FSB report addresses how the COVID-19 pandemic has been a “defin - ing feature of the past year with widespread implications.” Understandably so; the pandemic has impacted many firms in their transition away from LIBOR. Still, according to a survey of FSB members, it has not created pressing substantive roadblocks to the transition. The report states that the direct correla - tion between LIBOR and banks’ overall borrowing costs weakened during the pandemic, with volatility leading banks to scarcely rely on LIBOR markets for funding. Those that did use LIBOR rates faced challenges because of the pandemic. While central bank rates were decreasing throughout the world, LIBOR rates were increasing, and those rates were passed on to borrowers when financial systems were supposed to play a role in providing much-needed liquidity. Despite pandemic induced market disruptions, the FSB states that progress has been made throughout the past year in the transition. Many national working groups have produced their timely roadmaps as An Odyssey Away from LIBOR By Tim Dominguez, Associate General Counsel, Compliance Alliance