Independent Banker - November 2017 - 83

Nuts & Bolts
it actually paid. This dilemma led
officials to look for a new benchmark
to replace LIBOR.
What we know
In response to this challenge, the Federal
Reserve Board and the Federal
Reserve Bank of New York created
the Alternative Reference Rates Committee
(ARRC), engaging with market
participants in search of an alternative
to US dollar LIBOR. The ARRC has
looked to create a quality benchmark
by evaluating the liquidity, transaction
volume and resilience of the underlying
market. The benchmark should be
constructed using a sound methodology,
have evidence of a process that
ensures compliance and governance
structures, and be sensitive to the ease
of transition.
The ARRC has voted to replace US
dollar LIBOR with a benchmark rate
based on short-term loans known as
repurchase agreements backed by
US Treasury securities, also known
as Repos. The Federal Reserve Bank
of New York, in cooperation with the
US Treasury Department's Office of
Financial Research, will publish daily
what it calls a broad Treasury Repo
rate. The rate will be based on actual
Repo market trades, which can see
$600 billion to $800 billion in daily
volume. The new benchmark rate
will go through a round of public
comment and will likely be published
in the first half of 2018.
Current steps
Community banks will be affected,
because their loan portfolios, securities
portfolios and hedging structures
may include LIBOR-based pricing.
No immediate changes are needed,
because LIBOR will not be officially
phased out until the end of 2021.
However, institutions should consider
what benchmark to use for future
index-based loan structures. Some
benchmarks worth considering are
Prime Rate, Constant Maturity Treasuries
(CMT), and, once published,
the broad Treasury Repo rate.
It will become more important to
include flexibility in LIBOR-based
loan agreements to accommodate
changing the index for newly
originated loans maturing after
2021. In addition, institutions should
Fed funds target rate vs. three-month LIBOR
Jan. 1, 2007, through Dec. 31, 2016
5
6
4
2
3
1
2
1
2007
2008 2009 2010
2011
2012
2013
2014
2015
2016
Source: Bloomberg
independentbanker.org
ICBA IndependentBanker 83
2007
2008 2009 2010
2011
2012
2013
2014
2015
2016
The answers to the pop quiz are:
3-Mo LIBOR
FDTR Index
LIBOR - FDTR in BPs
3
amend any current LIBOR-based
loans maturing after 2021 to conform
with a new benchmark when it is
available and market transition plans
are fully developed.
Summary
The plan to replace LIBOR as a
benchmark interest rate is moving
along and now has a proposed
target date of 2021. In the US, much
progress has been made preparing
for the transition from LIBOR to
the new benchmark rate. In fact, the
new benchmark rate is currently
in testing, ensuring it meets all of
the required criteria. In the near
future, the ARRC will provide more
definitive information regarding the
implementation timeline and other
transition processes.
Webinar series
Jim Reber will present the final
segment of the 2017 Community
Bank Matters webinar series on
Nov. 7 at 10 a.m. CST. He will discuss
" Must-Dos for Year End, and
the New Year. " One hour of CPE
credit is available. To register,
visit viningsparks.com.
LIBOR research
Vining Sparks Interest Rate
Products, a subsidiary of Vining
Sparks, has published a research
report titled, " LIBOR Takes a Final
Bow. " For your copy of this analysis
of the LIBOR issue, contact
your Vining Sparks sales rep.
SAIF:
Savings Association Insurance Fund
FGIC:
Financial Guaranty Insurance
Company
RTC:
Resolution Trust Corporation
GIC:
Guaranteed Investment Contract
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Independent Banker - November 2017

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