Fed’s Quarles Says Markets Must Be Ready to Stop Using Libor
Fed’s Quarles Says Markets Must Be Ready to Stop Using Libor
(Bloomberg) -- Federal Reserve Governor Randal Quarles reminded market participants that they should stop using the London interbank offered rate in transactions by the end of the year and warned the Fed will supervise firms accordingly.
“There is no more time, and banks will not find Libor available to use after year-end no matter how unhappy they may be with their options to replace it,” the central bank’s vice chairman for supervision said Tuesday in remarks prepared for a speech to a Structured Finance Association Conference in Las Vegas. “Given the availability of SOFR, including term SOFR, there will be no reason for a bank to use Libor after 2021 while trying to find a rate it likes better.”
There’s roughly 12 weeks until the year-end deadline to ditch Libor for new deals, amid increasing competition from new reference-rate providers seeking to carve out their own slice of the post-Libor landscape. The one-week and two-month tenors will end, but the Libor quotes available until June 2023 will only be for legacy contracts.
“Use of these quotes for new contracts would create safety and soundness risks for counterparties and the financial system,” Quarles said.
A slew of reference rates, from Ameribor and BSBY to ICE’s Bank Yield Index, have garnered more attention as borrowers and bankers increasingly question whether the Fed’s long-preferred replacement, the Secured Overnight Financing Rate, is the best option for the multitude of markets that must ditch scandal-tainted Libor by year-end. (The Bloomberg Short Term Bank Yield Index, known as BSBY, is administered by Bloomberg Index Services Limited, a subsidiary of Bloomberg LP, the parent of Bloomberg News.)
This is even after the Alternative Reference Rates Committee, which has been charged with overseeing the transition away from U.S. dollar Libor, in July formally endorsed a series of forward-looking term benchmarks tied to SOFR, a move many anticipate will propel its wider adoption across markets.
Vigorous Enforcement
Real estate lender Walker & Dunlop Inc. became the first company on Tuesday to announce a U.S. leveraged loan market sale that fully embraces SOFR, a milestone in the shift away from Libor that could finally unleash a flood of copycats.
Quarles said with respect to loans, regulators issued a letter last year explaining that they haven’t endorsed a specific replacement rate, and reiterated that the guidance remains. He cautioned market participants should understand how their chosen benchmark is constructed and be aware of “any fragilities associated with that rate.”
“For logistical as much as for conceptual reasons, the use of term SOFR for loans will be fairly widespread” for those banks choosing to transition to SOFR, Quarles said during a Q&A after his speech.
Still, the cash markets have a long way to go before SOFR is the widely accepted rate, though the days of Libor are coming to an end.
The Fed will use “the full panoply of supervisory tools” to enforce the transition away from Libor, Quarles said in the Q&A. This may include everything from a stern letter to banks requiring immediate attention, to other types of formal enforcement actions “against banks that are egregiously failing the safety and soundness” risk requirements, he said.
“We will enforce it vigorously,” Quarles said
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