The NAFCU Journal September-October 2019 - 8

THE BOTTOM LINE

Cutting the Cord with LIBOR
By Curt Long

C

redit unions have plenty on
their plates these days. An
inverted yield curve and slowing economic growth threaten
profitability in the near term. Meanwhile,
planning for the approaching changes to
credit loss reporting standards and capital requirements are causing headaches.
In addition, credit unions must give due
consideration to the rise of fintech and
to their own long-term competitiveness.
One issue that may have been lost in the
crowd - but is deserving of their full
attention - is LIBOR transition.

Background on LIBOR

The London Interbank Offered Rate
(LIBOR) is essentially the rate at which
banks make short-term loans to one
another. The rate itself is constructed
from a survey of a panel of banks on
what that rate would be. LIBOR became
the standard rate included in derivatives
contracts, and so it grew in prominence
as the derivatives market exploded in
the 2000s.
Today, it is estimated that LIBOR is
the reference rate for a staggering $200
trillion of financial contracts. The vast
majority of those (around 95 percent)
are derivatives. Only a sliver is in the
form of consumer products, but that
total is still estimated to be $1.3 trillion.

The Trouble With LIBOR

Following the financial crisis, regulators imposed heightened capital and
liquidity requirements on banks. As
a result, the types of transactions that
form the foundation for LIBOR -
short-term interbank loans - occurred
8

less frequently. The quoted rate became
more dependent on the judgment of
those panel banks.
The system was ripe for manipulation.
Investigations began in 2010; lawsuits,
hefty fines and a criminal conviction
followed. It was clear that LIBOR's reputation had been irreparably damaged.
Moreover, the panel of banks submitting estimates to form the rate was
understandably reluctant to continue
doing so. Although the governing body
overseeing LIBOR has commitments
from the panel of banks through the
end of 2021, it will not compel those
banks to take part thereafter.

Enter SOFR

With the fate of LIBOR very much in
question, stakeholders began to consider
alternatives. Under the direction of the
Federal Reserve Bank of New York, the
Alternative Reference Rate Committee
(ARRC) convened in 2014 to identify an
alternate reference rate and to facilitate
transitioning away from LIBOR.
Their solution was dubbed the Secured
Overnight Financing Rate, or SOFR,
and it differs from LIBOR in some
key ways. It is a reference rate relying
entirely on transactions in the overnight
Treasury repurchase market, which is
a much more substantial one than that

THE NAFCU JOURNAL  SEPTEMBER-OCTOBER 2019



The NAFCU Journal September-October 2019

Table of Contents for the Digital Edition of The NAFCU Journal September-October 2019

The NAFCU Journal September-October 2019
Contents
Conferences
From the Chair
Washington and Industry Briefs
The Bottom Line
Access to Money
The Best Indirect Growth Strategy
Big Moments, Bigger Wallet Share
Executive Spotlight
Management Insight
Compliance Central
Inside NAFCU Services
Industry Perspectives
From the President’s Desk
The NAFCU Journal September-October 2019 - The NAFCU Journal September-October 2019
The NAFCU Journal September-October 2019 - Cover2
The NAFCU Journal September-October 2019 - Contents
The NAFCU Journal September-October 2019 - 2
The NAFCU Journal September-October 2019 - Conferences
The NAFCU Journal September-October 2019 - From the Chair
The NAFCU Journal September-October 2019 - 5
The NAFCU Journal September-October 2019 - Washington and Industry Briefs
The NAFCU Journal September-October 2019 - 7
The NAFCU Journal September-October 2019 - The Bottom Line
The NAFCU Journal September-October 2019 - 9
The NAFCU Journal September-October 2019 - Access to Money
The NAFCU Journal September-October 2019 - 11
The NAFCU Journal September-October 2019 - 12
The NAFCU Journal September-October 2019 - 13
The NAFCU Journal September-October 2019 - 14
The NAFCU Journal September-October 2019 - 15
The NAFCU Journal September-October 2019 - The Best Indirect Growth Strategy
The NAFCU Journal September-October 2019 - 17
The NAFCU Journal September-October 2019 - 18
The NAFCU Journal September-October 2019 - 19
The NAFCU Journal September-October 2019 - 20
The NAFCU Journal September-October 2019 - 21
The NAFCU Journal September-October 2019 - 22
The NAFCU Journal September-October 2019 - 23
The NAFCU Journal September-October 2019 - Big Moments, Bigger Wallet Share
The NAFCU Journal September-October 2019 - 25
The NAFCU Journal September-October 2019 - 26
The NAFCU Journal September-October 2019 - 27
The NAFCU Journal September-October 2019 - 28
The NAFCU Journal September-October 2019 - 29
The NAFCU Journal September-October 2019 - Executive Spotlight
The NAFCU Journal September-October 2019 - 31
The NAFCU Journal September-October 2019 - Management Insight
The NAFCU Journal September-October 2019 - 33
The NAFCU Journal September-October 2019 - Compliance Central
The NAFCU Journal September-October 2019 - 35
The NAFCU Journal September-October 2019 - Inside NAFCU Services
The NAFCU Journal September-October 2019 - 37
The NAFCU Journal September-October 2019 - 38
The NAFCU Journal September-October 2019 - 39
The NAFCU Journal September-October 2019 - Industry Perspectives
The NAFCU Journal September-October 2019 - 41
The NAFCU Journal September-October 2019 - 42
The NAFCU Journal September-October 2019 - 43
The NAFCU Journal September-October 2019 - From the President’s Desk
The NAFCU Journal September-October 2019 - Cover3
The NAFCU Journal September-October 2019 - Cover4
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