By John McCrank
NEW YORK (Reuters) - U.S. banks have been slow to offer non-financial firms alternatives to Libor rates for business loans, leaving many companies unprepared for the upcoming end of the benchmark rate and threatening broader market liquidity, an industry group said on Monday.
Libor, or the London Interbank Offered Rate, has been used to price around $200 trillion of U.S. financial contracts, from mortgages to derivatives. The rate is being scrapped after banks were fined billions for colluding to rig the rate. No new Libor contracts will be allowed after Dec. 31, though certain existing U.S. dollar Libor contracts will continue until mid-2023.
While there has been progress in creating and transitioning to alternative reference rates set by central banks, the use of Libor for business loans has actually increased over the past couple of years, said the Alternative Reference Rates Committee (ARRC), an industry group convened by the Federal Reserve.
"With essentially nine months left to end-2021, it is critical that market participants are actively taking steps to support the transition using the tools available now," said Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley (NYSE:MS).
The lack of progress in the business loans market was "concerning," because non-financial businesses need time to work with their vendors to be sure their systems will be able to accommodate new rates, ARRC said in a progress report https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf.
The delay in offering alternatives to Libor for business loans slows overall development in the derivatives markets used to hedge the loans, as well as in the markets that structure and securitize those loans, as liquidity in the cash and derivatives markets are interrelated, ARRC said.
"Banks and their customers need to be prepared for the transition, and this cannot occur if liquidity is slow to develop over the remaining months," the report said.