The Bankers Association of the Republic of China (銀行公會) would make a preliminary proposal next month on dealing with the retirement of the London interbank offered rate (LIBOR) — the world’s most-used benchmark for short-term rates — at the end of next year, the Financial Supervisory Commission said yesterday.
As many financial contracts are tied to LIBOR, the nation’s banks would need to figure out how to make adjustments without causing any controversy, Banking Bureau Deputy Director-General Huang Kuang-hsi (黃光熙) told a news conference in New Taipei City.
“Under the supervision of the central bank, banks would also need to discuss which alternative rates they would use to replace LIBOR,” Huang said.
LIBOR, the average interbank interest rate announced at about 11:45am in London each business day, is used worldwide to gauge funding costs and investment returns for financial products, such as financial derivatives, corporate loans, floating-rate bonds and securitized products, the commission said.
LIBOR is published daily in five currencies: the British pound, the US dollar, the euro, the Japanese yen and the Swiss franc, it said.
With the UK Financial Conduct Authority retiring LIBOR at the end of next year, many nations have introduced or recommended their own local currency-denominated alternative rates for short-term lending, it said.
They include the secured overnight funding rate (SOFR) in the US, the Sterling overnight index average in the UK, the euro short-term rate, the Tokyo Overnight average rate and the Swiss average rate overnight, it said.
“Given that banks have significant assets denominated in US dollars and consumers also prefer US-dollar products, it is likely that banks would use SOFR to supplant LIBOR,” Huang said.
Local banks would need to gain the central bank’s approval if they use new reference rates, he added.
As LIBOR and the five alternatives are calculated and published in different ways, banks need to evaluate the risks of the transition and set up adjustment plans, Huang said.
Given that there are gaps between LIBOR and other benchmark rates, banks need to communicate with their clients or other trading parties on using new rates, he said.
The central bank yesterday also called on local banking institutions to brace for the exit of LIBOR and carefully evaluate its effects.
Local lenders should examine existing LIBOR-based contracts and discuss with clients potential changes in terms and renew contracts accordingly, it said.
Banks should also identify the risks related to the suspension and conversion of LIBOR and their effects on business procedures, accounting and tax operations, risk-based assets and capital calculation models, it said.
They should come up with adjustment plans and review the plans regularly, it added.
Additional reporting by Crystal Hsu
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