Why banks still need to move full speed ahead on IBOR transitions

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There’s no slowing down the banking industry’s mandated transition to Interbank Offered Rate (IBOR) replacements. Despite the many difficulties posed by ongoing public health and economic concerns, many banks still expect to complete their IBOR replacement projects by the deadline of year-end 2021. Their progress would be fine — if that were the only deadline.

Unfortunately, banks face not just one IBOR deadline, but many. Some of these deadlines will arrive quite soon.

In fact, banks will need to start supporting new products as early as this year, 2020. At a minimum, by the fourth quarter of this year, new contracts still issued with reference to an IBOR must include fallback language to a new risk-free rate. Banking regulators want banks to demonstrate that they’re moving at an acceptable pace as they switch from IBOR to either the United Kingdom’s Sterling Overnight Index Average rate (SONIA) or international equivalents.

Similar milestones have been put in place for euros and U.S. dollars, and banks will need to change their discounting assumptions to match the clearer. For these and other related transitions, banks will be expected to prove their readiness well before year-end 2021. Some market watchers even expect to see a pre-cessation trigger for IBOR by as early as December 2020.

Banks may encounter other triggers, too. These could include customer demands for new non-IBOR products to be offered sooner rather than later. Regulators could exert pressure as well, especially if they determine that banks have failed to meet intermediate milestones.

Compounding the issue are a large number of factors that, for now at least, are impossible to predict. For example, how will banks handle nonperforming loans? This issue, which some expect to come to a head late this year, could add complexity at the same time that banks are working on their IBOR transitions, placing yet another constraint on bank resources.

The stakes are high. Any bank that fails to support new, non-IBOR products before year-end 2021 will likely suffer a competitive disadvantage, falling behind others that can support these products. In fact, this is already happening with floating-rate loan transactions.

Click over to the DXC website to download the full paper

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