2019 LIBOR Survey: Are you ready to transition?
September 16, 2019
September 16, 2019
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:
18%
Only 18% of survey respondents say their LIBOR transition plan is “mature.”
20%
Only 1 in 5 respondents say they are operationally ready for the LIBOR transition.
41%
Many respondents do not feel they have a unified and consistent approach to transition and remediation.
40%
Two in five respondents say regulatory uncertainty and lack of clarity hamper execution of their remediation efforts.
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:
This reported lack of clarity explains the inconsistent preparedness and varying response strategies our survey uncovered.
Many firms cite a lack of clarity from regulators and a lack of understanding across jurisdictions of what is required to transition by 2021.
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:
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.
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