Financial Services Ireland


IBORs: Winter (2021) is coming

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There has been a decline in unsecured lending between banks since the financial crisis, write EY’s Danny Buckley and Ken Phillips, in the latest issue of Finance Dublin. Significant system change may be required to accommodate a new set of interest rates, but there are opportunities, which they highlight here.

Whether Inter Bank Offered Rates (IBORs) continue beyond 2021 is very uncertain. The implications of their discontinuation will be far ranging from banks to corporates, from insurance to asset management and from consumers to SMEs. Financial services businesses face significant challenges to prepare their customers, products, processes and systems for IBOR transition. Now is the time for action!


IBORs theoretically represent the rate at which banks borrow from each other on an unsecured basis. IBORs are currently calculated from information provided by panel banks. In the UK and the US, the rate is the London Interbank Offered Rate (LIBOR). In Europe the equivalent is the Euro Interbank Offered Rate (Euribor).

For many years IBORs have provided the interest rates that determine interest payments on:

  • Customer loans/leases
  • Debt instruments
  • Derivatives and other financial instruments

There has been a decline in unsecured lending between banks since the financial crisis. Per the Bank of England’s Financial Conduct Authority (FCA), ‘LIBOR is measuring the rate at which banks are not borrowing from one another’ 1. This means that banks increasingly have had to use their judgement to estimate the IBOR rate which made the system vulnerable to manipulation. As a result, there was a need for change. The FCA took the first steps announcing that, from 2021, UK panel banks would no longer be compelled to submit rates.

In Europe, similar concerns over Euribor rates have also led to reform. However, even in relation to the reformed Euribor, there remain uncertainties as to how long it will continue. The ECB recently noted that ‘the long-term future of this benchmark rate… also depends on the availability of panel banks to support it 2.

Alternative reference rates (ARRs), which are overnight rates rather than the familiar term rates of the IBORs, have been established for most major currencies.

The challenge for financial institutions now is to start the process of transitioning their products, processes and systems from IBORs to these ARRs in an orderly fashion, while engaging with their customers to help them understand what the changes mean for them.

It is clear from recent ‘Dear CEO’ letters that regulators expect financial institutions to have considered the size and scope of IBOR transition, and that they will have a well-developed view of the risks inherent in the transition and plans to mitigate those risks.

Financial institutions will have customer contracts where the IBOR referenced in the contract may no longer be available during its life. Customer communication is therefore critical. The FCA have noted that ‘If you are a LIBOR borrower, you should be expecting your bank to contact you about the change ahead. 3


Another significant potential change may arise from the fact the new ARRs are overnight rates, whereas IBORs generally have a term structure (for example one month and three month rates). Under IBOR contracts customers know their interest payments one or three months in advance. Under ARRs they may only know the interest payment once it becomes due.

For new business, new products must have operative fallback language (contractual language in the event of an IBOR no longer being available) or, at the right time, products must reference ARRs rather than IBOR rates. Financial institutions will need to make sure they are communicating that the change is coming.

For the existing book, companies need to develop an understanding of the volume and nature of existing contracts to determine the extent to which these contracts need to be repapered.

Financial services companies also need to develop a comprehensive list of processes and systems which are impacted by IBORs, and then to assess the effort required to transition to accommodate the new ARRs.

Significant system change may be required to accommodate a new set of interest rates, particularly in the absence of a term structure in ARRs and a potential need for daily compounding of interest rates.

Given the level of change involved in IBOR transition there are potential opportunities from:

  • Product innovation: Obtain a first mover advantage by developing a suite of customer-centric, ARR based products.
  • Strategic simplification: Use the transition as an opportunity to simplify processes reducing cost and risk.
  • Contract estate: Digitise your contracts to create a reusable asset.

1 12 July 2018. Speech by Andrew Bailey, Chief Executive of the FCA, at Bloomberg, London – on transitioning from LIBOR to alternative interest rate benchmarks.
2 3 July 2019. ECB letter to Banks, ‘Banks’ preparation with regard to interest rate benchmark reforms and the use of risk free rates.
3 5 July 2019, Speech by Andrew Bailey, Chief Executive of the FCA, at the Securities Industry and Financial Markets Association’s (SIFMA) LIBOR Transition Briefing in New York, USA.


This article was written by Danny Buckley, partner, and Ken Phillips, director in the FS Financial Accounting Advisory Services practice, and first appeared in the August 2019 edition of Finance Dublin.

Thought Leaders

Danny Buckley

Banking & Capital Markets, Sector Leader

Ken Phillips

FS Partner, Financial Accounting Advisory Services