BOE Threatens Banker Bonuses Over Pace of Libor Transition
(Bloomberg) -- U.K. regulators are ready to hit bankers where it hurts over slow progress away from the London interbank offered rate.
The Bank of England and Financial Conduct Authority warned chief executives in a letter on Friday that they were intensifying scrutiny of Libor transition plans at financial firms, and said managers who fall short should get smaller bonuses.
The push comes ahead of a key U.K. milestone next week before the sterling benchmark itself expires at year-end. From Thursday, firms have been told to stop issuing linear derivatives, loans, bonds and securitizations linked to sterling Libor. Regulators may view continued use as poor risk management.
“I see what message the regulators are trying to send and it could spur banks to action, but it takes two to tango,” said Priya Misra, global head of interest rate strategy at TD Securities in New York. “The Libor transition is not just about banks doing their bit -- you need the borrowers and the investors to also play ball. I struggle with ‘performance’ -- is it effort or results?”
The BOE and FCA singled out the syndicated lending business for particular pressure. A number of firms within the business may be undermining the switchover and should not be allowed to put a brake on the transition, the BOE said. Any new sterling Libor syndicated lending commitment after this month will be viewed as a collective failing of all the banks in the syndicate, they said.
Libor, linked to everything from mortgages to derivatives, has long been discredited by manipulation scandals, yet it still underpins hundreds of trillions of dollars of assets around the world.
Executives will need to make sure they are not just meeting the deadline themselves, but also getting assurance that the transition will be clear and fair for their customers, according to Simon Woods, Ernst & Young’s global financial services Ibor lead.
Senior managers responsible for the task “should satisfy themselves that all appropriate actions are being taken,” the BOE and the FCA said in the letter. “As a key regulatory priority, we expect that this transition forms part of the performance criteria for determining their variable remuneration.”
Lewis Liu, chief executive officer at Eigen Technologies Ltd., said the bonus threat may help to focus minds.
“Many senior managers are dealing with a barrage of different crises: Covid-19, working from home, which is not innate to banking culture, and this transition,” he said. “They are extremely distracted.”
In a separate development on Friday, regulators raised the prospect that an artificial sterling Libor number could be published for up to a decade after the controversial benchmark is scrapped.
Concerned that some troublesome financial contracts won’t be able to switch to replacement benchmarks, the FCA plans to publish a “synthetic” London interbank offered rate. The BOE said that the FCA’s power to do this will need to be reviewed annually for a maximum of 10 years.
Most Libors are due to expire at the end of 2021, but regulators are concerned that bonds and securitizations risk descending into a legal limbo because they lack provisions necessary to switch and are too complicated to renegotiate.
The U.S. is planning to avoid synthetic Libor, and instead, New York state lawmakers approved legislation this week to smooth the transition, with the Federal Reserve calling for similar legislation at a national level. The BOE said the approach for dollar Libor tenors ending in mid-2023 would be kept under review.
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