Pub. 11 2020 Issue 3

www.wvbankers.org 12 West Virginia Banker W ith all the distractions and distracting challeng- es faced this year by the nation’s community bankers, it’s easy to understand how some may have lost track of an approaching deadline that could have significant consequences for their institutions and their customers. Unless some- thing changes and the authorities have been pretty clear that that’s unlikely to happen, the world’s most widely used benchmark for short-term interest rates will probably not be around after the end of 2021. After that, the London Interbank Offered Rate (LIBOR), long criticized for lacking transpar- ency and market responsiveness, will be replaced by the Secured Overnight Funding Rate (SOFR) as the primary reference rate for all dollar-denominated loans, deriva- tives, and debt instruments. What’s the Big Deal? To many, the transition to SOFR from LIBOR might seem like a simple task; just switch rates. But if that switch affects more than $200 trillion in mortgages, consumer loans, corporate debt, and derivatives, as this one does, there’s nothing simple about it. Even though the volume of finan- cial assets subject to the change is massive, that may not represent the greatest hurdle. If LIBOR is an apple, then SOFR is an orange, and while both are fruits, they are not exactly interchangeable parts. LIBOR’s roots go back to the late 60s, when a panel of bankers would each day report their fund- ing costs to what has now become the Intercontinental Exchange Benchmark Administration. Those numbers would be averaged, adjusted, and then reported to the world around noon, London time. The outdated process and Last Call for LIBOR By Lester Murray, The Baker Group