BOSTON–The financial markets need to pick up the pace when it comes to migrating away from LIBOR, according to a new report from a Federal Reserve committee.
According to the Fed, the move away from the most popular interest rate reference tool and the widely used benchmark will need to “materially accelerate” for the market to be adequately prepared to use the new base measure, the Fed said.
According to the Fed analysis, some products, such as business loans, have not diminished the use of the London Interbank Offer Rate (LIBOR) in setting interest rates.
“With essentially nine months left to end-2021, it is critical that market participants are actively taking steps to support the transition using the tools available now,” said Tom Wipf, chairman of the Fed Bank of Boston’s Alternative Reference Rates Committee (ARRC,) in a statement accompanying release of the report.
In the Fed report the ARRC stated use of one alternative rate – the Secured Overnight Financing Rate (SOFR), which the organization selected four years ago as its preferred alternative reference rate – has seen a “considerable uptick” in trading activity through 2020 in floating rates notes and consumer mortgage markets in particular.
But the report also knows adoption has not been as widespread as need be, with the report noting new data on outstanding exposures to U.S. dollar (USD) LIBOR and reveal use of LIBOR has continued in some markets.
Most Widely Used
LIBOR is the most widely used reference rate for adjustable-rate mortgages and other loans. It is being phased out because the transactions upon which it is based don’t occur as often as in prior years.
“Although an estimated 60% of current LIBOR exposures will mature before June 2023, an estimated $90 trillion will remain outstanding – a fact that underscores the importance of finding solutions for legacy contracts,” the ARRC said in its statement.
In November, 2020, U.S. federal banking agencies began advising institutions the rate should not be used for new contracts and, in any event, not following Dec. 31, 2021, after which regulators have said they can no longer guarantee production of the rate.
‘Robust Fallback Language’
The agencies said any new contracts entered into before Dec. 31, 2021 should either use a reference rate other than LIBOR or have “robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.”
By Ray Birch MILWAUKEE—Auto lending is emerging as one of the biggest areas of risk for credit unions, even as the broader U.S. economy continues to perform better than many expected, according to Bill Handel, chief economist at Raddon, a Fiserv company. Delinquency trends in auto portfolios are now approaching levels last seen during the Great Financial Crisis, Handel said, driven by a combination of high vehicle prices, elevated interest rates and increasing financial pressure on lower-income consumers. “There’s probably still a lot of risk in the auto portfolios,” Handel said. “Our numbers in terms of delinquency behavior in the United States are now rivaling what they were during the Great Financial Crisis.” Economy Holding Up Better Than Expected Despite those pockets of risk, Handel said the broader economy remains surprisingly resilient. “If you look at the U.S. economy, it’s actually performing quite well—probably better than most people would have anticipated,” he said. ...
Comments
Post a Comment
Please no profanity or political comments.