You are here: Home - News -

Banks to transition from ‘unsustainable’ LIBOR

by:
  • 27/07/2017
  • 0
Banks to transition from ‘unsustainable’ LIBOR
The benchmark lending rate, used by some mortgage lenders to set rates, is unsustainable to produce, FCA head Andrew Bailey (pictured) said today.

LIBOR – the London Interbank Offered Rate – will end in 2021, according to regulator the Financial Conduct Authority (FCA).

As there is no longer enough wholesale lending between institutions, banks have been basing their submissions to LIBOR on judgements rather than actual transactions.

“The underlying market that LIBOR seeks to measure – the market for unsecured wholesale term lending to banks – is no longer sufficiently active,” said Bailey.

“On the basis of what we can currently observe, activity in these markets is limited, and there seems little prospect of these markets becoming substantially more active in the near future.”

“If an active market does not exist, how can even the best run benchmark measure it? Moreover, panel banks feel understandable discomfort about providing submissions based on judgements with so little actual borrowing activity against which to validate those judgements.”

While many panel banks are no longer keen to shoulder the risk of submitting to LIBOR, the FCA has asked them not to pull out of the benchmark until an orderly transition to a new system can be made. It does have the power to compel banks to continue for a limited time but Bailey said it is preferred this isn’t used.

“We could not – and cannot – countenance the market disruption that would be caused by an unexpected and unplanned disappearance of LIBOR,” he said.

In the UK the Risk Free Rate Working Group has selected reformed SONIA (Sterling Overnight Index Average) as its proposed alternative benchmark.

The Bank of England is working to co-ordinate plans for transitioning. Similar work is also under way in the US.

“The transition will be less risky and less expensive if it is planned and orderly rather than unexpected and rushed,” said Bailey.

He added that there has been support from the panel banks for sustaining LIBOR for a four-five year transition. However the process for changing existing contracts or amending the definition of LIBOR to reference an alternative rate will need to be decided.

A spokesman for trade body UK Finance said not many mortgages would be directly affected. Most mortgages track the Bank of England base rate.

“There were only ever a very small number of mortgages that were linked to LIBOR. That will have been reduced further as any time-limited deals come to an end, he said.”

“Lenders will have to agree a new approach in line with the terms and conditions of the contract if there are any mortgages that extend beyond 2021.”

There are 0 Comment(s)

Comments are closed.

You may also be interested in

Business Skills

In this section, we offer short ‘how to’ guides on harder to crack areas of business. From social media, to regulation or niche product areas, we cover it all.

Profiles

Our journalists interview key industry entrepreneurs, strategists and commentators for day-to-day market insight and a strategic view of where the industry is heading. We offer lessons for success and explore the opportunities for your business

Success in Practice

Here, we share case studies fleshing out best practice to help you decide what could work for your business. Take a look at how others approached complex tasks like launching a new mortgage lender, advising on a new product area or deciding to specialise in another. Learn from others mistakes and triumphs.

Marketwatch

Each week, we ask top mortgage and property commentators with a unique perspective to examine a key news headline, market move or regulatory or political issue.

Poll

Vote in our weekly poll here. It’s your chance to tell us what you think and be heard on the top news stories of the week. Review our archive to find out what your industry really thinks and all our coverage of the results.

Top Comments

Be part of the conversation on Mortgage Solutions. We want to hear from you. We have a tool called Disqus to tell us which stories get the most comments each week. Every Friday, the team picks the most thoughtful or opinionated contributions from our readers to enjoy again. Don’t forget to share your favourite stories from the site on social media to keep the conversation going.

Read previous post:
Nottingham reports lending growth as broker strategy continues to pay off

Nottingham Building Society has reported gross lending of £544m for the first six months of 2017, an increase of 33%...

Close