Benchmark rates in upheaval — replacement of LIBOR
On June 8, 2016, the EU Commission issued the EU Benchmark Regulation (BMR)* of the European Parliament and of the Council on benchmarks (reference rates). Benchmarks are referred to in financial instruments and contracts, and are also used to measure the performance of investment funds. The aim of the BMR is to ensure that the benchmarks provided and used in the EU are robust, reliable and representative.
The publication of LIBOR will be discontinued
Arguably the most important benchmark for global financial markets is the London Interbank Offered Rate (LIBOR) published by the ICE Benchmark Administrator. This is provided daily in different maturities for the 4 main currencies: Swiss franc (CHF), US dollar (USD), Japanese yen (JPY) and British pound (GBP). The UK regulator responsible for LIBOR, the Financial Conduct Authority (FCA), announced on March 5, 2021 that publication of CHF, JPY and GBP LIBOR will cease at the end of 2021, and that of USD LIBOR will cease on June 30, 2023.
New: Alternative reference interest rates
As a replacement, alternative reference rates (ARRs) have been established in the respective currencies. These are also referred to as Risk-Free Rates (RFRs). As a consequence of the LIBOR cessation, the LIBOR-linked interest rates of the affected contracts are switched to the economically closest alternative reference rate.
LIBOR rates also include an interbank credit risk premium, which is absent from alternative reference rates. This is taken into account in the form of an adjustment spread (fixed by a recognized external organization on March 5, 2021). This type of adjustment ensures economic equivalence for both contracting parties.
The cessation of LIBOR interest rates does not only affect the conversion of existing contracts. Erste Group Bank, Erste Bank and Sparkassen will also follow the regulatory requirements regarding the use of benchmark rates when offering new products. We support the switch to alternative reference interest rates - and we support our customers in finding their way in an environment without LIBOR interest rates in the best possible way.
The content of this page represents the current understanding of Erste Group Bank, Erste Bank and Sparkassen regarding the LIBOR conversion and is subject to change. This overview is neither complete nor conclusive. It is not a substitute for a detailed assessment of the impact on you or your organization by independent experts - and it does not constitute advice or a recommendation.
* Regulation (EU) 2016/1011 (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016R1011)