Why You Need to Start Preparing for the End of Libor

January 3, 2020 at 9:16 am 2 comments

New York State’s decision to mandate that regulated financial institutions report in writing the steps they are taking to prepare for the end of Libor is a tad heavy-handed. That being said, the Department is onto something by putting financial institutions on notice that it is time to think about life after the London Inter-Bank Offered Rate. In other words, even if you are not a state charter, your institution should start assessing the impact of a post-Libor world on your operations. Here’s why.

Libor is in many ways a classic British creation reflecting how much banking norms have changed in a very short time. It has its roots in key banks in a group of institutions in the old city, consulting with each other on a daily basis about the interest rates they were charging. In an era when half the people on the phone undoubtedly knew each other from their days at Eton and Oxford, this kind of chummy professionalism was not unheard of. In fact, Libor became such a widely used index for pegging interest rates that credit unions are still allowed to use it when making their own variable rate investments, pursuant to 12 C.F.R. 703.14, even though it is not a domestically derived index. Unfortunately, Libor’s simplicity made it extremely easy for investment bankers to conspire to manipulate. For example, Bank A could simply lobby the other banks to set a higher index rate on a daily basis.

This was, of course, illegal. NCUA successfully sued banks over their Libor manipulation. In late July 2019, it unsuccessfully tried to get out of its settlement after realizing just how much investment interest had been lost to the industry.

It is not surprising, then, that regulators want to see Libor ended, and it is widely assumed that this will occur by the end of 2021. DFS has joined other financial regulators in telling financial institutions that it is time to plan for life after Libor. For example, a faithful reader directed me to the most recent OCC risk assessment, in which it explained that “many market and banking participants use Libor as a benchmark for pricing financial instruments. The OCC is increasing regulatory oversight of this area to evaluate bank awareness and preparedness for Libor’s anticipated cessation.”

While it is true that credit unions do not have hundreds of sophisticated contracts tied to interest rate derivatives, as the existing regulatory framework makes clear, credit unions have long used Libor as an index. The end of Libor can be easily prepared for. In contrast, the failure to make plans now could get you enmeshed in the proverbial sticky wicket of contract disputes, which would make for great blog content, but a lousy day in credit union land.

Something to do for the weekend

For those of you who inexplicably want to get out of the house this weekend, instead of watching a gazillion hours of football, yours truly suggests going to see Knives Out. It is by far the most intelligent, entertaining movie I’ve seen in years. It is the type of plot which typically makes for one of those 10 hour Netflix series.

On that note, enjoy your weekend. Go Titans.

Entry filed under: Compliance, Legal Watch, New York State. Tags: , , , , .

New York State Rings in the New Year With a Host of New Mandates Cybersecurity, Escrow, Conversions and Football Highlight a Busy Few Days

2 Comments Add your own

  • 1. Thom Powers, Jr.  |  January 3, 2020 at 1:22 pm

    Knives Out…Ana de Armas is the next big thing. Knock, Knock she could win a Golden Globe in an upset Sunday night.

    Reply
    • 2. Henry Meier  |  January 3, 2020 at 1:45 pm

      Great minds think alike, Thom. I also think Christopher Plummer should get nominated for best supporting actor. My god, the man is 90, and he starred in the Sound of Music almost 55 years ago.

      Reply

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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