"No LIBOR in New Contracts"… US Financial Authorities Urge Banks to Ban Its Use

Joint Statement... Ban on Use from Late 2021
WSJ Rates as "Strongest and Clearest Guideline"
Ribo Phase-Out Delayed to June 2023

[Image source=AP Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] The U.S. financial regulatory authorities have informed commercial banks not to use LIBOR (London Interbank Offered Rate) for new transactions starting from the end of 2021, the Wall Street Journal (WSJ) reported on the 30th (local time). This appears to be an effort to gradually reduce usage amid concerns that the phase-out of LIBOR may be delayed until June 2023.

In a joint statement released that day, the U.S. financial authorities said, "Using LIBOR for new contracts after 2021 will pose prudential risks," adding, "For that reason, we will monitor banking practices."

LIBOR has been a representative benchmark interest rate used globally as a standard for numerous contracts, but following the discovery of rate manipulation by Deutsche Bank, UBS, Barclays, JP Morgan, and others in 2012, its abolition was decided.

The WSJ evaluated this decision by the financial authorities as "the strongest and clearest guideline regarding the risk factors for banks entering into new contracts based on LIBOR."

The U.S. Federal Reserve Board (Fed) and the UK financial authorities announced that LIBOR rates will be used only until June 2023, after which they will be replaced by secured overnight financing rates. Secured overnight financing rates utilize rates provided on secured assets such as loans or bonds instead of relying on bank quotes.

The Bank Policy Research Institute assessed, "The decision to maintain the application of LIBOR rates to existing contracts until 2023 is a cautious step to promote an orderly transition."

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