What you need to know.
By the end of 2021, Fulton Bank will no longer be issuing new loans utilizing LIBOR (London Interbank Offered Rate). SOFR (Secured Overnight Financing Rate) is expected to be the primary replacement as the benchmark for determining interest rates. Banks around the world are also preparing for this transition, as the most common one month LIBOR rate publication will be phased out by June 2023.
What is Libor
LIBOR has been used globally as a benchmark to gauge funding costs and investment returns for financial contracts for more than three decades. It is used to help set the interest rates on many products including loans, swaps, bonds, credit cards, adjustable rate mortgages, and other products offered by financial institutions.
Why LIBOR is being phased out
Changing industry norms and LIBOR manipulation scandals are driving a shift away from LIBOR, causing interbank lending markets to become much thinner and the number of actual transactions upon which the rate is based to decrease significantly. That has caused regulators globally to actively advocate that markets move away from LIBOR to a more reliable index.
How Fulton Bank is preparing for the LIBOR transition
We have a large team dedicated to this transition and closely engaged with market activities. No action is required of clients at this time. We will continue to provide industry updates as the transition progresses and your relationship manager will reach out to you directly to address your loan.
Frequently Asked Questions
What are the alternative rates to LIBOR?
Neither the industry nor any bank has a perfect replacement for LIBOR. While certain rates receive many of the headlines, additional alternatives are still being considered.
The Alternative Reference Rates Committee (ARRC), an industry group convened by the Federal Reserve Board and the New York Fed, recommends using the Secured Overnight Financing Rate (SOFR). SOFR is considered a more robust reference rate than LIBOR as it is wholly based on actual transactions and represents an active daily market.
What is SOFR?
SOFR is based on transactions in the U.S. Treasury repurchase, or repo, market, where banks and investors borrow or lend Treasuries overnight.
- It is produced by the New York Fed in cooperation with the Office of Financial Research each business day.
- SOFR is continuing to develop and will have multiple variations. Daily Simple SOFR, SOFR in Advance and SOFR compounded in arrears are currently published. Term SOFR is under development and not yet available.
- The ARRC released A User’s Guide to SOFR to further explain details about SOFR and how market participants can use it in cash products.
How is SOFR different from LIBOR?
Although LIBOR and SOFR reflect short-term borrowing costs, they are calculated very differently:
- LIBOR is an unsecured rate, has multiple tenors, has a credit risk component, is set by panel banks, and may be derived using estimated rates.
- SOFR is a secured rate, is a daily rate (overnight), is considered risk free, and is based entirely on actual transaction data from the repo market.
- SOFR is foundationally different than LIBOR, resulting in the need for a spread adjustment. Bloomberg began publishing an indicative spread adjustment (based on the 5 year median spot difference between USD LIBOR and SOFR) in July 2020.
How will the transition away from LIBOR affect my loan?
Fulton Bank will treat the transition as value-neutral. While some customers may see a slight adjustment in their payments, we are working to ensure that customers will not be adversely financially impacted by the change.
What do I need to do to prepare for the transition from LIBOR?
No action is required of existing clients at this time. Your Fulton Bank Relationship Manager will provide further updates in advance of any necessary changes. Reference this site for additional resources on the LIBOR transition and industry developments.
- ARRC: Alternative Reference Rates Committee
- Bloomberg: IBOR fallbacks and spread fixing for LIBOR (PDF)