Libor Transition – What You Need To Know

The London Interbank Offered Rate (LIBOR), the index used to determine the rate on various financial products, is being discontinued for industry use as of June 30, 2023. As this index is phased out, Ephrata National Bank is preparing to transition loans currently utilizing this index to an alternate benchmark for determining rates and will no longer originate loan products using LIBOR. Here’s what you need to know.

WHAT IS LIBOR?

Libor is a benchmark interest rate that has been used historically in financial contracts as the basis to determine interest rates for a variety of business lending solutions and mortgage products including loans, bonds, swaps, credit cards, and adjustable rate mortgages.

WHY IS LIBOR BEING PHASED OUT?

LIBOR is being discontinued as a benchmark interest rate globally as of June 2023. In recent years, there have been changes in transactional volumes to the markets that influence LIBOR. Because of this, the index has become unreliable and subject to manipulation since it is influenced by the judgement of a panel of banks rather than on robust market data, which has greatly impacted its credibility.

WHICH BENCHMARK RATE WILL REPLACE LIBOR?

Alternative Rates Reference Committee was created by the Federal Reserve Board and the Federal Reserve Bank of New York in an effort to determine potential replacements for LIBOR. The committee has issued a recommendation that the Secured Overnight Financing Rate (SOFR) replace LIBOR.

SOFR, produced by the Federal Reserve Bank of New York, meets international benchmark standards and is published in a transparent, direct manner based on actual transactions in one of the largest and most active markets in the world.

HOW IS SOFR DIFFERENT FROM LIBOR?

Although LIBOR and SOFR both reflect short-term borrowing costs, they are calculated differently:

  • LIBOR is an unsecured rate, has multiple tenors, has a credit risk component, is set by panel banks, and may be derived using estimated rates.
  • SOFR is a secured daily rate (overnight), is considered risk free, and is based entirely on actual transaction data from the repo market.
  • SOFR is foundationally different than LIBOR, resulting in the need for a spread adjustment. Bloomberg began publishing an indicative spread adjustment (based on the 5-year median spot difference between USD LIBOR and SOFR) in July 2020.

WHO WILL BE IMPACTED BY THIS TRANSITION?

Since LIBOR is referenced in many different types of financial contracts, moving away from the rate could impact a variety of businesses and individuals. This could include:

  • Corporate and municipal borrowers financing operations with LIBOR-based floating rate loans and/or bonds
  • End-users hedging risk with LIBOR-based derivatives
  • Investment banks underwriting, issuing and making markets in LIBOR-based instruments
  • Investors managing portfolios of swaps, bonds and loans tied to LIBOR
  • Consumers with mortgages or student loans tied to LIBOR
  • Certain credit cards that use LIBOR

HOW IS ENB PREPARING FOR THE TRANSITION FROM LIBOR?

Ephrata National Bank has had a team in place working on this transition to ensure a seamless experience for our customers affected by the transition. Customers who have existing LIBOR-based loans adjusting beyond June 2023 that do not contain adequate provisions addressing LIBOR cessation, will receive a notification in advance of any changes to add or amend those provisions and to transition them to an approved replacement rate index.