Reform of key reference interest rates as of 2022

(LIBOR replacement)

At the end of 2021, one of the most important key figures on the financial markets, the reference interest rate LIBOR (London Interbank Offered Rate) published by the ICE Benchmark Administration (IBA), will be ceased. Specifically, the publication in Swiss francs (CHF), Japanese yen (JPY) and British pounds (GBP) is to be discontinued at the end of 2021. The LIBOR rates for US dollar (USD) have a longer period of validity and are to be published by 30 June 2023.

In the future, alternative reference rates (ARRs) or risk-free rates (RFRs) will be applicable. For existing contracts (e.g. derivatives or loans), this means that the LIBOR-linked interest rates will be switched to the economically closest alternative reference rate as of 1 January 2022. However, the discontinuation of LIBOR does not only affect existing contracts, BENDURA BANK AG will of course also use ARRs for new contracts/products.

More about LIBOR

LIBOR is the reference interest rate at which banks lend money to each other on the (unsecured) money market. The customer interest rate is calculated from the aforementioned reference interest rate (base rate) plus a margin. For example 3-M-CHF-LIBOR (= base) plus 150 bps (= margin). For contracts with variable interest rates, the basis can thus change on the agreed interest rate change date (e.g. quarterly), but the agreed margin remains unchanged.

LIBOR calculation

LIBOR is recalculated daily by a few panel banks for the various maturities. However, these are only estimations and not actual impositions. For the final calculation of the reference interest rate, only the average 50 percent of the interest rates are used; the deviations are not included in the calculation.

Background of the reform

After agreements among the participating panel banks and thus manipulations of LIBOR have occurred in the past, only transparent and transaction-based reference interest rates should be used in the future to protect consumers and the financial markets (EU Reference Values Regulation).

Reference interest rates as of 2022

As of 1 January 2022, the LIBOR interest rates will be replaced by alternative reference rates (ARRs). These ARRs are based exclusively on real market transactions and were developed by national working groups in cooperation with market participants and supervisory groups/central banks.

Overview of the most important ARRs

***The reference interest rate EURIBOR (European Interbank Offered Rate) was reformed and remains in use.

Compared to LIBOR, the new reference interest rates do not include any risk premiums. In order to reflect the originally agreed LIBOR as closely as possible, predefined risk premiums are added to existing contracts. For new contracts, however, these risk premiums are already included.

Customers affected by the LIBOR replacement will receive further information in the fourth quarter of 2021. If you have any questions or need support, our experiences relationship managers are pleased to assist you.

Disclaimer
The content of the above article reflects the current understanding of BENDURA BANK AG on the replacement of LIBOR. This information has been provided on the basis of trustworthy and reliable sources of information. The published information has been compiled with the greatest possible care. However, we do not guarantee the completeness, accuracy and currency of the information contained in this publication. Its content is subject to change at any time. This article reflects the opinion of BENDURA BANK AG as of the date stated in this document. It is possible that the content of earlier and/or future publications does not/will not correspond to the content of this contribution. There is no obligation to inform the recipients of this. The content of this contribution does not replace personal advice from a qualified expert.

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