The 2021 phase-out of the London Interbank Offered Rate (LIBOR) is not new to banks, capital markets and insurance firms. Accenture’s 2019 LIBOR Survey, finds more than four in five financial providers preparing for the upcoming shift with LIBOR transition plans.
But our findings suggest having a transition plan in place is not the same as being prepared for this challenge. Given LIBOR’s essential role for financial firms and the assets they manage, some industry experts think the shift to risk-free rates (RFRs) might be the greatest challenge facing financial institutions today.1
Our data tells the story:
How much LIBOR preparation is needed?
LIBOR currently underpins approximately $400 trillion in financial contracts for derivatives, bonds, mortgages, commercial and retail loans, representing an enormous challenge. Regulators have urged firms to start building transition plans, with the Financial Conduct Authority (FCA) issuing a "Dear CEO" letter in December 2018 asking for evidence of those plans.2 A flurry of activity followed, but as of June 2019 the Federal Reserve Vice Chair still did not believe the industry was moving fast enough.3
If the transition away from LIBOR is so essential, why are financial providers moving slowly? If they are hoping for a delay of the 2021 end date, providers may need to think again—regulators have consistently communicated that LIBOR’s end will arrive on schedule.
Even so, our study found evidence of confusion among financial providers around timing and other essentials:
- Forty percent of respondents report significant regulatory uncertainty and lack of clarity.
- Firms have a conflicting perspective on how prepared they need to be, suggesting they may lack a clear understanding of the core details needed to respond effectively.
- A majority of respondents do not yet have transition funding in place or are underfunded.
- When they do have funding, respondents seem uncertain as to where they can make the largest impact.
- Firms disagree about whether incremental revenue from the transition can offset remediation costs. Some 38 percent think there will be an offset, while 34 percent don’t.
- Some firms do not think the 2021 deadline represents the end point for the LIBOR transition, with more than 40 percent of respondents expecting transition and remediation costs to continue into 2022, and more than 30 percent expecting these to continue into 2023.
This reported lack of clarity explains the inconsistent preparedness and varying response strategies our survey uncovered.
What’s the sound way to transition from LIBOR?
While financial providers may show a lack of urgency in their transition plans, we strongly advise them to nonetheless be prepared and take steps to accelerate their transition efforts. Firms should assess the risks and costs of servicing remaining LIBOR products in a shrinking market. This scenario is akin to a business wind-down, in which continuing operations may be prohibitive. Any upside to keeping LIBOR products on the books would be offset by the possible costs of maintaining a segregated operating model, the higher capital charges to LIBOR products with limited price points, and interest rate gaps and mismatches.
In short, the risks of an untimely transition from LIBOR outweigh potential benefits.
If you’re ready to accelerate your LIBOR transition strategy, we recommend these immediate, "no regret" actions as a starting point:
- Mobilize: Assign dedicated staff to your program, alongside senior sponsors and program leads.
- Assess impact: Get arms around the risks and impacts across products, contracts, processes and technology.
- Build a baseline: How will your transition cover financials, risk contracts and infrastructure?
- Create the plan: Design a transition plan based on regulatory timelines, milestones and scenario assumptions.
- Establish governance: Build a governance and accountability model that incorporates key stakeholders and escalates decision making.
- Plan and budget: What’s the change plan and budget for your transition effort?
- Communicate: Define an internal and external transition plan that includes client outreach.
- Digitize contracts: Develop a central LIBOR contract database by digitizing contracts and extracting essential data.
- Manage risk: Mitigate your exposure to operational, liquidity and basis risks during the transition.
- Develop new products: Create new or amended products and portfolio strategies leveraging the new risk-free rate.
Transitioning from LIBOR is not an activity to be taken lightly. Accenture offers end-to-end capabilities to help you assess and execute your LIBOR transformation. Our skilled, dedicated global team builds actionable solutions to help you avoid pitfalls and help you effectively complete your LIBOR transition. Contact us to learn more about how we can help.
1 "Libor will not transition quietly – What you need to know now," Risk.net, June 17, 2019.
2 "Feedback on the Dear CEO Letter on LIBOR transition,"Financial Conduct Authority, June 2019.
3 "The Next Stage in the LIBOR Transition (via prerecorded video)," Vice Chair for Supervision, Randal K. Quarles, speech, Board of Governors of the Federal Reserve System, June 3, 2019.