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The Impact of LIBOR on Financial Institutions

Major changes are coming to the finance industry worldwide as regulators are pushing for banks to move away from LIBOR (London Interbank Offered Rate). This is potentially the largest ever fundamental change that the finance industry has had to deal with. 

The replacement of LIBOR with other Risk Free Rates (RFRs) is being managed differently by country. For this, financial institutions worldwide are experiencing an overwhelming amount of work in terms of effort, cost and time, and a level of uncertainty about its downstream impact. 

This article will take a look at what these organizations can expect and recommend solutions for making the transition more efficient.

What is Libor?

Before jumping into other matters, let’s make sure we have a firm understanding of what LIBOR is. 

LIBOR is the published daily interest rate that banks know that it will cost to borrow from another bank. The Financial Conduct Authority (The FCA) is the regulatory agency currently responsible for overseeing LIBOR while ICE Benchmark Administration (IBA) is currently responsible for administering and publishing LIBOR..

LIBOR is calculated in five different currencies and it’s used as a benchmark for lending and similar transactions across the globe. It is referenced for financial contracts including derivatives, mortgage and commercial loans accounting for more than $300 trillion. 

It is no wonder that financial institutions will have a lot of work to do and will need to dedicate a lot of time and money into carefully making the shift.

Scope

The move away from LIBOR will affect many of the existing loan contracts that financial institutions have on file. Teams will have to locate these contracts, review them, extract LIBOR attributes and apply new remediation language to replace the old standard. Contractual provisions that may be affected include maturity date, the firm’s role in the contract, benchmark use, amendment and consent regulations, governing law and jurisdiction and force majeure provisions. Each of these potential issues will have to be addressed and resolved for every individual contract affected. This is not easy considering that each bank have a a lot of contracts!

Cost

Financial institutions may have to bring in skille teams dedicated to the amendment of contracts which means additional hiring costs. New technology may be needed to enforce the transition and keep the system running smoothly. Furthermore, with the 12/21 LIBOR transition date looming ahead, the teams may have to work overtime. All this can be quite costly. Many financial institutions may not have the resources, especially during this time of worldwide lockdown, to sustain the additional workforce needed to accomplish the task of contract remediation.

Time

Even with teams working overtime and with additional staff, many financial institutions may not have the resources to successfully meet the timeline of 12/21. They should consider using intelligent automated contract remediation services for this massive task. These services may provide zero touch high quality LIBOR remediation that allows the bank to continue with business as usual, while Artificial Intelligence does much of the work faster, cheaper, and better. 

Cleareye is known for providing products and services best suited to their clients’ unique situations. They improve productivity and make systems more effective to boost your bottom line and are trained to make your transition from LIBOR as seamless as possible.  

The LIBOR transition is causing an upheaval in many financial institutions. Cleareye will provide banks with the intelligent automated contract remediation services that will make the transition as cost and time efficient as possible. 

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