What is LIBOR?
LIBOR, which stands for the London Interbank Offered Rate, is a benchmark rate that represents the amount banks would pay to borrow from each other on an unsecured basis. To determine the benchmark rate, a panel of banks submits data of what they would pay the other banks for short-term loans (sometimes on a hypothetical basis reflecting estimates and expert judgment). Since the Alternative Reference Rate Committee (ARRC), a financial industry group, has recommended SOFR as the replacement for LIBOR, we are moving forward with this assumption and offering certain products—including residential and commercial mortgages and some commercial loans—using SOFR.
The LIBOR benchmark rate is used to help set the cost of government and corporate bonds, mortgages, student loans, credit cards, derivatives, and other financial products. As LIBOR fluctuates, loan rates can move up or down.
LIBOR is now being phased out
For over 40 years, LIBOR has played a significant role in the worldwide financial services industry. However, an ongoing slowdown in unsecured bank debt market activity has now diluted LIBOR’s relevance. As the volume of this interbank lending has declined, the underlying market that LIBOR strives to measure is no longer sufficiently active to sustain the production of a consistently reliable benchmark over the long term.
As a result, several LIBOR benchmark settings, including the 1- and 2-month U.S. Dollar LIBOR tenors as well as all EUR and CHF LIBOR settings, ceased being published on December 31, 2021. At the direction of the U.K. Financial Conduct Authority (FCA), which oversees LIBOR, LIBOR’s administrator, ICE Benchmark Administration Ltd (IBA), continues to publish several GBP LIBOR settings in a “synthetic” form that does not represent the market those settings were historically designed to measure. The FCA has announced that “synthetic” versions of 1- and 6-month GBP LIBOR will continue to be published through March 31, 2023. The FCA is expected to make future announcements concerning the final date “synthetic” 3-month GBP LIBOR will be published.
With respect to the overnight, 1-month, 3-month, 6-month and 1-year USD LIBOR settings most commonly used in the United States, the FCA and IBA have stated that they will cease being published in their current form after June 30, 2023. The FCA is currently consulting the market regarding “synthetic” USD LIBOR.
In accordance with jointly issued regulatory guidance, banks and other market participants have largely ceased originating new USD LIBOR business and are now using alternative reference rates, including SOFR-based rates. To minimize the risk of disruptions, banks and other market participants also are working to ensure that legacy LIBOR contracts are amended, when necessary, to adequately address what happens when LIBOR is no longer available.
The Alternative Reference Rate Committee (ARRC), a financial industry group, has recommended using the Secured Overnight Financing Rate (SOFR) as well as CME Term SOFR as alternatives to LIBOR (albeit with certain product-specific limitations). It is important to note that the ARRC was convened by the Federal Reserve Board and the New York Fed specifically to help facilitate the U.S. transition away from LIBOR. Members include a mix of banks, accounting firms, legal firms and other industry representatives.
We’ll be ready and keep you updated
The transition to a new benchmark following the widespread use of LIBOR in the financial markets is a significant event. To prepare, we are:
- Closely monitoring LIBOR developments and devoting all necessary resources to its transition, with an enterprise-wide initiative to address every opportunity and issue involved
- Working with regulators and industry groups to see how we can tailor their recommendations to our specific client segments
- Providing information and updates as they become available on this page for you
Frequently asked questions about the LIBOR transition
Since ARRC has recommended SOFR as the replacement for LIBOR, we are moving forward with this assumption and offering certain products—including residential and commercial mortgages and some commercial loans—using SOFR. We will continue to monitor the situation in case anything changes.
SOFR and LIBOR are calculated differently:
- SOFR is based on actual transactions and is considered a broad measure of the cost of borrowing cash overnight collateralized by Treasury Securities, a secure, risk-free measure.
- LIBOR is set by a panel of banks estimating what they think their borrowing costs are for unsecured debt.
All other things being equal, since SOFR is risk-free, SOFR may have a lower rate.
Although banks have been advised not to originate new LIBOR loans after 2021, the most commonly used U.S. dollar LIBOR options will continue to be published until June 30, 2023. KeyBank is monitoring legislative and industry developments and will contact you with more information when appropriate.
At this time, we do not have specific details on how existing LIBOR-based rates may be affected by the switch to a SOFR-based rate. We will be fair and as transparent as possible and provide details as they become available.
KeyBank has elected to follow the International Swaps and Derivatives Association’s (ISDA) 2020 IBOR Fallbacks Protocol. Visit ISDA.org to read KeyBank’s adherence letter and view the list of adhering parties. If you, too, adhere to the Protocol, then swaps entered into between us before January 25, 2021, will be deemed amended to incorporate the Protocol’s fallback provisions. For swaps entered into on or after January 25, 2021, the 2006 ISDA definitions (which contain the relevant fallback language similar to that contained in the Protocol) are incorporated.
KeyBank does not require, and cannot recommend or advise, a borrower to adhere to the Protocol. The decision on whether to adhere is entirely the borrower’s decision to make. KeyBank can accommodate borrowers who adhere to the Protocol or do not adhere to the Protocol.
KeyBank will work with our clients to assist them in pursuing consistent trigger and fallback language, to the extent possible, so that any hedge instrument remains as effective as possible once the transition has been completed.