Independent Banker - November 2017 - 82

Nuts & Bolts
PORTFOLIO MANAGEMENT
LIBOR announces retirement
A key fi nancing rate is set to ride into the sunset.
By Jim Reber and Greg Roll
is, until end 2021. " The FCA believes
a four- to fi ve-year transition away
from LIBOR will be less risky and less
expensive if it is planned and orderly,
rather than unexpected and rushed.
Looking forward, US fi nancial institutions
will need to assess the use of
LIBOR as a benchmark and plan for
its ultimate demise.
P
ICBA
VOICE
___
ICBA
VOICE
op quiz: How many of you
know what these initialisms
mean (and you may
be putting yourself in a
certain age demographic
if you do): SAIF, FGIC, RTC or GIC?
Each of them does, or did, apply to
Jim Reber (jreber@icbasecurities.
com) is president and CEO of ICBA
Securities, ICBA's institutional,
fi xed-income broker-dealer for
community banks.
_____________
the community banking industry.
We'll provide the answers later.
A quarter-century from now,
LIBOR, too, will be collecting dust,
which is hard to imagine at the
moment. A top UK regulator recently
said it would phase out the London
Interbank Offered
Rate, a benchmark
used in setting
prices for trillions
of dollars of loans
and derivatives for
US banks.
In July, Andrew
Greg Roll, CFA (groll@
viningsparks.com) is senior
vice president and investment
strategist of Vining Sparks, ICBA
Securities' exclusive broker.
____
___________
Bailey, CEO of the
Financial Conduct
Authority (FCA),
said, " I and my
colleagues have
therefore spoken
to all the current
panel banks about
agreeing voluntarily
to sustain LIBOR
for a four- to fi veyear
period, that
82 ICBA IndependentBanker November 2017
Reason for change
LIBOR was created by the British
Bankers Association in 1986 as a way
to price syndicated loans and interest
rate swaps. Since then, it has become
a vital pricing benchmark for loans
originated by depository institutions
across the country. LIBOR is based
on the average rate that a group of
banks estimate they would be able
to borrow funds from each other.
The unsecured borrowings are based
in one of fi ve different currencies
across seven different borrowing
time periods.
The demise of LIBOR began
shortly after the fi nancial crisis of
2008, when regulators found dozens
of fi rms worldwide had colluded
to set the benchmark at levels that
would benefi t their own LIBORlinked
portfolios. In 2013, offi cials
published a set of principles to make
the market more transparent, including
using data from actual trades
when possible.
Although the policies set forth
were designed to minimize confl icts
of interest ultimately leading to a
better process for establishing LIBOR
rates, many market participants
have deemed the rate itself to be
unreliable. The lack of actual trade
data for certain currencies and/or
tenures created a situation in which
the contributing bank estimates a
rate it thinks it would pay, not what
Independent Banker - November 2017

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