G20 report warns over Libor transition preparedness

A G20 survey of regulators’ plans for Libor transition has found half of respondents from non-Financial Stability Board member jurisdictions have no strategy for the transition – as the Bank for International Settlements and FSB urge regulators worldwide to cooperate ahead of the benchmark’s phasing-out.

BIS and the FSB jointly published the report on 9 July. It is due to be presented to the G20 on 18 July.

It summarises findings from a questionnaire distributed to the Basel Committee on Banking Supervision and members of the FSB regional consultative groups ahead of the Libor benchmark’s phasing out after 2021.

The FSB received 57 responses to the questionnaire. It says the “completeness and level of details” varied across jurisdictions – which it said reflected authorities’ “varying stages and/or abilities” to assess the issues posed by Libor transition.

The report says regulators in Libor jurisdictions are “relatively more advanced” in their preparations than those in non-Libor jurisdictions. Although many large banks in non-Libor jurisdictions are planning transitions, there is a “wider range in the level of preparedness”, the report says.

It says that while most of the FSB’s 25 jurisdictions had a transition strategy, half of respondents from non-FSB jurisdictions did not. It warns that non-FSB jurisdictions are less likely to foresee the risks of Libor transition, due to perceptions that the benchmark is less frequently used in their jurisdictions, and says half of respondents from those jurisdictions are not monitoring banks’ transition progress.

It identifies adequate preparation as a key challenge, saying otherwise Libor discontinuance would have potential impacts on financial stability. The FSB has highlighted global exposure to US dollar Libor as a particular area of concern. Saudi Arabia, Singapore, the Philippines and Thailand all have benchmarks currently tied to dollar Libor. Saudi Arabia is working on a new methodology to calculate its rate, while Singapore is planning a transition to a new rate.

The report says the transition will require “significant commitment and sustained effort” from banks and other institutions, and says developing products referencing alternative benchmarks will be a major challenge, as will increasing liquidity in those products.

The International Swaps and Derivatives Association (ISDA) is currently working on amendments and protocols to allow alternative benchmarks to be adopted into existing derivatives contracts. But the report warns there is less progress when it came to introducing standardised fallback language into existing cash products.

The report adds that “very few” jurisdictions had set up dedicated roll-off timelines, although some had been supporting private sector initiatives. Most jurisdictions were still undecided about whether to take supervisory action against individual banks whose preparatory work was unsatisfactory, it said.

It encourages regulators to do more to promote awareness of Libor cessation, particularly among smaller financial institutions. It said they should seek regular updates from banks, which should identify their senior management figures responsible for the transition.

It also urges regulators to identify legislative solutions to mitigate the exposures of ‘tough legacy’ contracts – an approach adopted by the UK last month.


Get unlimited access to all Global Banking Regulation Review content