5 minute read 18 Jul 2019
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How IBOR can act as an opportunity to accelerate the business agenda

IBOR transition provides banks with the opportunity to innovate – to improve their product offering and become more customer centric.

After a decade of regulatory-driven programs and low interest rates, financial services firms are looking to get back on the front foot to drive growth and profitability, while embracing customer centricity and the digital agenda. It would be easy to see IBOR transition as another regulatory compliance exercise – and a distraction to the business agenda. But, this would be to miss out on the strong commercial benefits that could be achieved.

It’s true that IBOR transition is complex and will involve aspects of a large transformation program. However, we are increasingly seeing and hearing from our clients that IBOR transition can act as a catalyst to accelerate the business agenda.

We see three main areas of opportunity:

  • New products and offerings, centered around the new ARRs and customer needs
  • Strategic simplification, with a view to reducing complexity within the business, whether from a product, model, process or operations perspective
  • Acceleration of the digital agenda, building new business models on clean IT, while accelerating the run-down of legacy

New products and offerings

As the old IBORs are phased out, financial services organizations need to introduce new products based on the new ARRs. IBOR transition therefore provides banks with the opportunity to innovate – to improve their product offering and become more customer centric.

Initial product innovation has been particularly focused on derivatives, as banks seek to gain first-mover advantage. In the history of investment banking, the banks that move first to develop a new derivatives product, gain a competitive advantage and a market share. They generally create more profitable and sustainable franchises, based on their understanding of customer needs and market liquidity.

Strategic simplification

Banking operations have become highly complex in recent years, with multiple systems and processes that have led to reduced efficiency. Banks could simply add another “patch” to encompass the new ARR-based trading environment. Alternatively, they could take a more forward-looking approach. IBOR transition provides the opportunity to reboot – to strip out complexity and drive simplicity through the business. The transition touches the organization from front to back, providing a catalyst for banks to look at all their core systems and processes, and reengineer them to reduce complexity where possible. This should enable them to move to a simpler, robust and digital operating platform – one that works better both for the bank itself and for its customers.

Accelerating the digital agenda

Many banks have legacy platforms and systems that are struggling to cope and expensive to run and maintain. IBOR transition provides an opportunity to accelerate banks’ digital agenda – to start greenfield operations or to digitize contracts in order to become more efficient.

A number of banks are looking to move from an analog world to a new digital arena and build their operations around the cloud. They are looking to interact with customers directly through mobile channels or other digital applications. Particularly in the retail and cash space, banks have the opportunity to move to “digital by default”. We’re seeing banks using IBOR transition as the catalyst to build greenfield digital banks – going straight to digital, rather than try to reengineer old platforms and processes. For these banks the result is a win-win: not only does the bank address its IBOR transition challenge, but it also positions itself strongly for the future with a new, modern, digital operating platform.

Another way that banks are using the IBOR transition to embrace a new digital way of working is through investing in a digital contract warehouse. Banks have multiple contracts, many of which are still in paper format. Accessing and reading those contracts – and understanding the exposure attached to them – has historically proven to be a challenging task. Given that IBORs are embedded in almost every contract, the task of manually reviewing every contract and understanding the implications of IBOR transition is daunting.

Therefore, a number of banks are considering investing in creating a digital contract warehouse – essentially a digital database of all their contracts. This would enable them to access, read and change their contracts far more easily and efficiently. As a result, the IBOR transition would become more manageable. Furthermore, these banks will have future-proofed themselves. They will be ready to respond the next time that contracts need to be accessed and reviewed on a major scale, which seems almost an inevitability given the regularity of change in the banking sector.

Risk mitigation

While seeking to seize the business opportunities that genuinely arise through IBOR transition, financial services organizations will also need to take steps to mitigate associated risks. For example, banks will need to consider how to define their pricing strategy for ARR-based commercial and consumer loans, and manage downside risk on net interest income in a stress scenario. They will also need to measure and manage basis risk during the transition for themselves and their clients.

But, there are risks too from being slow to innovate with new product offerings. Banks could lose competitive advantage to faster-moving competitors. In addition, banks face conduct and legal risks arising from the transition and we anticipate consumer regulators will expect banks to lead in communication and education of their clients and customers. Taking earlier action to address IBOR transition is therefore a sound business strategy.

Getting on the front foot

EY clients regularly ask us how they can gain commercially from IBOR transition, as well as meet the change requirements. In our view, there is a natural fit between commercial gain and the change program involved in IBOR transition.

To run an efficient and effective transition program, organizations need to understand their starting position, their desired end point, and then form a plan – their roadmap – to get there. It would be possible to focus only on the basic actions needed to replace IBORs with the new ARRs. However, the transition period provides a great opportunity to think about how to make things better. Could processes be improved? Could some costs be stripped out from the organization? Could operations be made more digital and suited to future business opportunities and customer needs?

Organizations that ask and answer these types of questions will be able to capture real business benefits, rather than just achieve transition compliance.


Migrating from interbank offered rates (IBORs) to the new alternative reference rates (ARRs) is far more than a compliance exercise. Banks and other financial services organizations can gain real commercial benefits and competitive advantages by approaching the challenge in the right way.

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By EY Global

Ernst & Young Global Ltd.