Move Away from LIBOR Would Hurt Banks

Despite industry groups’ efforts to prevent a move away from LIBOR as a benchmark rate for derivatives transactions, global regulators appear increasingly likely to do just that, people with knowledge of the matter say.

With many banks already having switched to overnight-indexed-swap rates for valuing collateral-backed trades since the 2008 financial crisis, unsecured deals are expected to follow the same route. Because rates on these transactions are significantly higher, however, banks that are forced to make the change face potentially significant losses.

“That adjustment is likely to be a debit and the numbers can be large, even in the hundreds of millions for the major global banks,” said Yura Mahindroo, director at PricewaterhouseCoopers in Melbourne. “But it’s still evolving. We haven’t seen that much take up.”

The Basel III reforms, set to take effect on January 1st, 2013, set capital requirements for uncollateralized transactions. The burden on banks will also increase as mandatory clearing requirements kick in for many types of OTC derivatives over the coming months.

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Photo credit: Anthony Quintano

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