LIBOR Transition: What You Need to Know
The London Interbank Offered Rate (LIBOR) has been a global benchmark interest rate used to set interest rates on everything from multinational business loans to adjustable-rate residential mortgages. And soon, it will go away. So what happens next, and what does that mean to you?
While Republic Bank of Arizona has few loans tied to LIBOR, we want to keep you informed of this important change, what it means and how you can prepare for any impacts this phase-out may have on you or your business.
What is LIBOR and why is it important?
LIBOR is an interest rate average calculated and published under the authority of a U.K. regulatory agency based on daily estimates by a select group of global banks of what it costs those banks to borrow money from one another.
Many banks around the world have used LIBOR as a pricing index for the products they offer to customers. These products range from many common types of loans, including commercial loans and adjustable-rate mortgages, to more complex financial instruments like interest rate swaps.
There are a few different reasons LIBOR is going away. The primary reason is its unreliability. Since there are so few global banks lending to one another, the average rate has become volatile and less reliable. In fact, the Federal Reserve estimates that LIBOR may currently be based on fewer than 10 transactions per day. That has made it very difficult to judge how accurately LIBOR reflects the conditions in the short-term lending market that it’s supposed to represent.
What is replacing LIBOR?
According to the experts, the Secured Overnight Financing Rate (SOFR) is the best metric to replace LIBOR. The SOFR is calculated from the actual cost of transactions in short-term loans backed by U.S. Treasury bonds. Since SOFR is calculated based on real transaction data, rather than estimates like LIBOR, it is more reliable and less subjective. Secondly, the short-term loans used in the SOFR calculation represent one of the most common transaction types currently in use.
How RBAZ is preparing
Republic Bank of Arizona has identified those customers who have loans with us based on the LIBOR index. These loans will transition to the SOFR index, and those customers will be notified before the transition takes place, according to RBAZ Chief Credit Officer Amy Lou Blunt. No action is required from our customers.
Want to learn more? Customers can contact their RBAZ banker if they have any questions regarding this transition.