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.
Commercial lending must transition from LIBOR this year but the forward direction is unclear. Our perspectives can help with understanding the landscape and guiding transition strategy.
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