New York Fed President John Williams has a message for all U.S. companies involved in financial contracts: Refrain from any new use of U.S. dollar-based Libor.
“It doesn’t matter whether you’re a large global bank or a local company with a handful of employees, you need to be prepared to manage your institution’s transition away from Libor,” Williams said in a webinar hosted by the New York Fed and the Bank of England.
Libor, the London Interbank Offered Rate, has been used as the reference rate for adjustable-rate loans such as mortgages, student loans and credit card debt but is being discontinued by the end of 2021 because of scandal. Investigations by regulators in Europe and the U.S. in 2012, prompted by reports years earlier, found that several bankers manipulated Libor rates, costing borrowers billions in overpayments.
“The transition from Libor is so great that despite the effects of COVID-19, the overall timeline remains the same: There are now 537 days until the existence of Libor can no longer be assured,” Williams said. “The clock is still clicking.”
While the pandemic didn’t disrupt the timeline for ending the use of Libor as a key reference lending rate, it exacerbated its unreliability. “This spring during the period of severe market stress … term lending transactions based on Libor became even more scarce than usual,” Williams said.
“The urgency to switch to more robust reference rates and deal with the legacy contracts has not gone away,” he said. “If anything, this issue has become more pressing.”