Creation: 08 Feb. 2022 07:57
More than a month into the new year, financial institutions in Bermuda are still considering what to do to replace Libor, a major component set to be phased out of use in rate setting at the end of 2021. ‘interest.
The Bermuda Bankers Association said individual banks will implement the new benchmark rate through confidential consultations with the Bermuda Monetary Authority as part of the BMA’s prudential oversight process.
Association CEO Thomas J. O’Rourke said, “Our main challenge as an industry will be educating borrowers on benchmark rate changes and their impact on the pricing of their loan facility. respectively.
“When I see constructive industry advice from official sources like the Federal Reserve, I will post it on our website and social media.”
For more than four decades until the end of the year, the London Interbank Offered Rate (Libor) was the benchmark used by banks to set the interest rates they charged on financial products such as loans adjustable rates, mortgages and corporate debt.
Mr O’Rourke said the phasing out of Libor is an issue they have been following through the BBA’s risk sub-committee.
He said: “While final replacement decisions rest with individual banks and the final elimination of US dollar Libor is not until June 2023, we find that the Federal Reserve Bank – Secured Overnight Funding Rate (SOFR) is currently the main replacement rate for the United States.
“As the majority of the Bermuda banking sector’s foreign exchange assets are in US dollars, banks will be seeking regulatory guidance on the transition to SOFR as they move towards the final break from US dollar Libor.”
The Libor was used in a wide range of financial products in all major currencies.
But his days were numbered after he featured prominently in a series of banking scandals dating back to the 2007/2008 financial crisis.
Regulators and public and private sector working groups in several jurisdictions were considering how to support a transition to alternative tariffs and develop new products that reference them.
HSBC Bank Bermuda warned customers on its website: “The reforms may impact the HSBC products and services you currently use and those we may provide in the future.”
The bank also stresses that its website messaging reflects HSBC’s understanding of the reforms from January 2022 and that customers should contact their professional advisers about the possible implications of the changes, such as financial, legal, accounting or tax consequences. .
Butterfield Bank’s web notification says it was using the 2021 transition period to engage with customers, who have credit or loan agreements that incorporate adjustable interest rates and the benchmark Libor as a benchmark.
The bank stopped issuing credit agreements that use Libor as the sole benchmark interest rate and switched customers to other benchmark rates. But he acknowledged that it was an evolutionary process.
The way the Libor was determined is part of the reason for his disgrace.
Eighteen global banks around the world were each allowed to determine their expected rate payable to a competitor to borrow from them in the interbank lending market in London – not what the rate was, but what each bank said it believed the other bank would charge them.
Suitably handicapped, the average would only be determined after the four highest numbers and the four lowest numbers were discarded.
But individual banks could display any number. This led to scandals and allegations of rate manipulation.
Financial problems in 2008 were said to have been indirectly linked, and later a 2012 Libor investigation revealed widespread manipulation and collusion.
Thomas J. O’Rourke: CEO, Bermuda Bankers Association (file photo)