3 minute read 23 Jul 2019
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How banks can improve their readiness for the IBOR transition

By

Shankar Mukherjee

Ernst & Young – United Kingdom Financial Services Advisory Partner

Banking & Capital Markets transformation leader. Passionate believer in the ability of better risk management to drive business growth.

3 minute read 23 Jul 2019

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It’s not too late for banks to implement plans and collaborate with the industry to achieve a smooth and timely IBOR transition.

The London interbank offered rate (LIBOR) is expected to be retired in 2021 and the Bank of England (BoE) has sounded a call for financial institutions to take the deadline seriously. Banks need to accelerate their implementation plans and proactively manage the issues and challenges of moving away from LIBOR and transitioning to alternative reference rates (ARRs).

A panel event on 5 June 2019, Last Orders Calling Time on LIBOR, brought together representatives from the BoE, Financial Conduct Authority (FCA) and the Working Group on Sterling Risk-Free Reference Rates. Participants shared their views on market readiness and flagged key issues requiring further discussion.

Coinciding with the event, the FCA and Prudential Regulation Authority released a summary of key findings and next steps based on responses to their “Dear CEO letter” that was sent to major banks and insurance companies last September. This letter was expected to drive firms to focus on interbank offered rates (IBORs), help raise awareness and serve as a blueprint for transition readiness.

Two important takeaways emerged from the panel discussion:

  1. The IBOR transition should be a board-level issue for all financial institutions – not only those that received the “Dear CEO letter.” Accountability and responsibility are themes that all senior governance committees should prioritize on their agendas. The BoE event provided further clarity on the need for engagement from senior executives. 
  2. Regulators are listening and adopting a collaborative approach with the industry. This is reflected in the new Sterling Senior Advisory Group that is working with banks to identify issues and propose positive steps to address the complex challenges.

Taking a broader view

As regulators look at the big picture, it is clear that the industry’s efforts around the use of new rates in the sterling market have increased and are ahead of expectations. However, the BoE has been surprised by the different levels of readiness and the slow response by some banks. Supervisors are working closely with firms and encouraging those who are less prepared to take action and close the gap with those leading the way.

Another strong message is the need for financial institutions to undertake more detail in their impact assessments. To adequately plan, they must understand the magnitude of the transition to the new risk free rates, including risk assessment, exposure, systems and flow through processes. Participants agree that the scale of the IBOR transition poses a more significant technical challenge than both MiFID II and Brexit.

Over US$400t of global products reference LIBORs – and the volume continues to increase as new contracts are written. Banks need to act now to discontinue new IBOR-linked issuances to achieve a smooth and timely transition. No one wants a legacy portfolio that extends beyond 2021 and payments that cannot be settled.

What should banks do now?

The FCA has published key themes from the responses to the “Dear CEO letter.” Banks that have received individual feedback from the regulator now need to act on those findings. However, all financial institutions have an opportunity to use those themes to benchmark their implementation strategies against industry performance and the expectations of regulators.

EY teams propose that the industry focus on three key areas:

  1. Undertake detailed impact assessments to understand the scope and scale of the effort
  2. Meet customer expectations by delivering a program that simplifies, improves and digitizes systems, models and products as they transition
  3. Address conduct risk by engaging with the regulator on specific issues, while continually communicating with the board

For additional comments from EY teams please download our press release and video.

Summary

The London Interbank Offered Rate (LIBOR) is expected to be retired in 2021 and the Bank of England (BoE) has sounded a call for financial institutions to take the deadline seriously. Banks need to accelerate their implementation plans and proactively manage the issues and challenges of moving away from LIBOR and transitioning to Alternative Reference Rates (ARRs).

About this article

By

Shankar Mukherjee

Ernst & Young – United Kingdom Financial Services Advisory Partner

Banking & Capital Markets transformation leader. Passionate believer in the ability of better risk management to drive business growth.