By Alun John
HONG KONG (Reuters) – Few Asian banks will be able to make loans this year using new rates designed to replace Libor benchmarks, key software vendors say, leaving them facing a scramble ahead of Libor’s demise as the coronavirus pandemic further complicates transition plans.
Global regulators want to stick to the end-2021 date for scrapping the lending rate, despite calls from some in the industry to push back the deadline because of the impact of the pandemic on business activity.
If the banks have not moved all new and existing contracts to reference alternatives to Libor (the London Interbank Offered Rate) by 2022, then more than $300 trillion worth of bonds, derivative contracts and loans worldwide could be tied to a benchmark that no longer exists.
The uncertainty would be enormous and some borrowers may technically default on their loans.
Asia’s lenders trail rivals in London and New York, where regulators pushed the changeover aggressively, before the coronavirus pandemic reset the focus on other matters than lending benchmarks.
“Banks in Asia are doing all their awareness and analysis this year and preparing to be able to offer the new rates next year,” said Gregg Cerniglia, who leads fintech FIS’ loan platform ACBS.
“Those in London and the U.S. want to be able to bring to market and service the new rates this year.”
Authorities demanded the financial industry move away from Libor after several banks were found to have manipulated Libor for profit, and fined around $9 billion.
Shifting to new benchmarks requires consensus on standards, software upgrades by vendors, and changes in banks’ internal systems.
After Dec. 31, 2021, the UK’s Financial Conduct Authority, which regulates Libor, will not make banks submit estimates from which it is calculated, meaning Libor should cease to exist.
Arnaud Picut, global head of the risk practice at fintech Finastra, which provides the Fusion LoanIQ software also said that their Asian clients were behind.
“Looking at the heat map of where we are busy, first came the U.S. and then London and the euro zone, now we are only starting to have meetings with Asian clients about the new software for pricing loans using the alternative rates,” he said.
Software is key to the transition. Libor’s estimates-based system means it is simple to gather bankers’ views on borrowing costs up to 12 months in the future.
The new rates are based on real, overnight transactions, requiring complex calculations to set longer-term versions.
Contracts for Libor-pegged loans which extend into 2022 must also be revised.
The coronavirus pandemic pushed Libor transition planning down the list of priorities for UK banks, Reuters reported citing sources.
In Asia too, the virus and its fallout has distracted bankers from other issues including Libor transition, said Andrew Ferguson, CEO of the Asia Pacific Loan Market Association (APLMA).
The situation in Asia is further complicated by the variety of domestic rates used alongside U.S. dollar Libor, and local officials’ different approaches.
In Japan, there are 6,500 trillion yen ($60 trillion) worth of Libor-related contracts, but while yen Libor will also cease in 2021, officials have not favoured either of two alternative lending rates.
Singapore is moving to a new rate, the Singapore Overnight Rate Average, because its main benchmark relies on Libor
Hong Kong’s and Australia’s domestic benchmarks, Hibor and BBSW, are staying, but regulators warn their banks are still exposed to Libor. Hong Kong is also developing an alternative rate.
“Most Asian benchmarks have a robust calculation system and no history of manipulation. As they did not make many changes, you can see why we have been lagging,” said the APLMA’s Ferguson, “but anyone writing U.S. dollar loans needs to know exactly what’s going on.”
Some 56% of respondents to an APLMA survey earlier this year said they did not think the Asia Pacific syndicated loan market would be fully ready to use SOFR (the U.S. dollar Libor replacement) by 2021.
“The banks haven’t got much time left,” Ferguson said.
(Editing by Jennifer Hughes and Jacqueline Wong)