What Does Replacing LIBOR Mean for Financial Services Firms?
The London Interbank Offered Rate (LIBOR), is a series of benchmark interest rates and has been called the “world’s most important number.” It is a globally recognized base rate for pricing loans, debt, and derivatives. As a key part of the financial services infrastructure, more than $240 trillion in products reference LIBOR.
As its underlying transactions have diminished, regulators have announced a target date to replace LIBOR and begun the process of identifying and creating alternative rates. However, these rates are structurally different from LIBOR and it is unclear how existing products referencing it will change, and what new products will emerge. There is the possibility of significant customer and economic impact and uncertainty over how this will develop.
While this may not be the final word, LIBOR’s ubiquity and potential sunset means it is time for institutions to focus on the LIBOR replacement timeline, a potentially very significant program of activity.
Progress has been made for the transition, however there is still much to do. Our new report on replacing LIBOR outlines why the speed of change needs to accelerate ahead of 2021, before laying out actions for banks, regulators, and market infrastructure to take.
LIBOR is a cornerstone of the financial industry today, and a transition away from it would impact a vast array of products, businesses, systems and processes, as well as customers and counterparties.Serge Gwynne, Partner, Oliver Wyman
While the discontinuation of LIBOR may seem far away, the magnitude of the transition and potential for financial impact means financial institutions must start mobilizing near term.Adam Schneider, Partner, Oliver Wyman