Implications of Covid-19 on the IBOR Transition

With the Coronavirus pandemic unfolding and threatening banks’ financial health, countries, central banks, and other financial institutions worldwide are taking remedial actions to calm down the markets.

In the following we would like to emphasize three aspects of the IBOR transition impacted by the Coronavirus crisis: (1) impact on deadlines, (2) rising banking risk premiums and (3) the behavior of SOFR under stress.

Implication on regulatory deadlines

On March 12, 2020, the European Central Bank (ECB) released a plan, to provide temporary capital and operational relief. In their press release, it was announced that “the ECB is discussing with banks individual measures, such as adjusting timetables, processes and deadlines. For example, the ECB will consider rescheduling on-site inspections and extending deadlines for the implementation of remediation actions stemming from recent on-site inspections and internal model investigations, while ensuring the overall prudential soundness of the supervised banks.” The imminent Securities Financing Transaction Regulation (SFTR) go-live was already postponed, while the IFRS 17 deadline is under discussion.

During the crisis, banks need their staff for more pressing tasks, like contingency planning, coping with the economic impact and dealing with capital and liquidity risks, than working on the IBOR transition.

However, it is unclear whether regulators will follow the lead. Since the IBOR transition is more market- than regulatory-led, much depends on the reaction of financial players, infrastructure providers and industry bodies.

The most pressuring deadlines are the (potential) LIBOR and Eonia cessation dates end of 2021. Regarding LIBOR, the Financial Conduct Authority (FCA) already confirmed they will not force panel banks to contribute after 2021. A majority of market participants expects that panel banks will stop contributing, since this just entails downside risks, and, accordingly, LIBOR will no longer be published. Further publication of Eonia (after 2021) will likewise depend on the Financial Services and Markets Authority (FSMA) enforcing EMMI, the relevant administrator, to do so.

1 2 3 4 5