Libor Exit to Cost Global Banks $100 Million Each This Year

Most major global banks will spend more than $100 million each this year preparing for the end of the discredited Libor rate, according to Ernst & Young.

A majority expect bills for the transition to then dip below $50 million over 2022 and 2023, a survey by the accountancy firm found. Firms are pouring money into overhauling IT systems and payment settlements, as well as renegotiating contracts with individual counterparties, according to bank executives and their advisers.

The survey shows the toll of exiting the London interbank offered rate, which still underpins $260 trillion in contracts globally, according to the latest estimates from the U.K. Financial Conduct Authority. Many Libor rates will likely be phased out at the end of 2021, though global regulators may delay the timeline for abandoning some until mid-2023.

“Clarity and finality to the transition will be useful for the market and for all firms from a cost perspective,” said Beth Hammack, global treasurer at Goldman Sachs Group Inc., which like other banks declined to reveal how much it was spending.

Several major firms have had dedicated teams in place to deal with the shift since 2018. Wells Fargo Bank NA has a transition office with about a dozen full-time staff specialized in areas including derivatives and cash products, as well as project management and communications, according to Brian Grabenstein, managing director and head of Libor transition.

“Outside the Libor transition office, hundreds of Wells Fargo employees in the various business lines and functions are working full or part-time,” he said in a recent interview.

Domestic banks are spending considerably less and are at greater risk, according to EY, which surveyed 28 firms between November and January. Some 85% have budgeted less than $25 million in 2021, with others putting aside less than $10 million. Firms across the board expect to spend a third of their budget making technological changes, with about a quarter earmarked for repapering legal contracts so they can transition to new rates.

At JPMorgan Chase & Co., staff throughout the business including trading, operations and legal departments, are working on exiting the benchmark, according to Chris Palmer, head of the bank’s Libor transition program. “We don’t just have one Libor team working in isolation,” he said. “That’s fundamentally important -- but also a huge lift.”

Citigroup Inc. meanwhile established a global Libor transition in February 2019 and is developing a coordinated response across all businesses and functions, according to Rekha Jogia-Soni, a spokeswoman for the bank.

A major point of contention between banks and clients or note holders is who will pay to amend contracts for securitizations, according to Claude Brown, a partner at Reed Smith LLP in London, adding that in most cases, banks have absorbed the costs.

Around Libor generally, bigger banks “have a more complex set of exposures. On the other hand they’re more aware of the problem,” said Simon Woods, EY’s global financial services Ibor lead. He pointed to Brexit as an example, where trade challenges this year have come for smaller firms. “That’s where people haven’t paid attention or can’t afford it.”

Some pivotal dollar Libor rates such as the three-month tenor may still persist for a further 18 months. EY predicts costs may rise further on this extension, and the problems with large numbers of financial contracts incapable of switching to replacement rates.

Some 82% of firms surveyed expect to cease issuing new loans linked to Libor by year-end, up from two thirds 12 months ago.

Interim deadlines are now looming. By the end of March, firms should have ceased issuing new sterling Libor-linked bonds, loans, securitizations and linear derivatives that expire after year-end, according to a Bank of England-backed working group. In the U.S., regulators have told banks to stop entering into new Libor-linked contracts by year-end at the very latest.

“Our primary concern is not the banks now,” said Marcus Burnett, director of SOFR Academy, an education technology firm whose clients include lenders and asset managers. “It’s hedge funds, asset managers and the non-financial corporates in the S&P 100, which are by in large just beginning some of these processes.”

©2021 Bloomberg L.P.

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