Randal K Quarles: Goodbye to all that - the end of LIBOR
Speech by Mr Randal K Quarles, Vice Chair for Supervision of the Board of Governors of the
Federal Reserve System, at the Structured Finance Association Conference, Las Vegas,
Nevada, 5 October 2021.
* * *
Now that business travel has started to pick back up as we emerge from the COVID event, a
prosaic but insistent problem has reappeared: what to read on a long plane flight. Like most of
you, I try to get some work done-but, also like most of you, out of an amalgam of security
concerns and indolence, I often don't succeed. Something must improve the hours, but Kant is a
little heavy, P.G. Wodehouse a little light, and T.S. Eliot looks like you're just showing off. So, over
the last few weeks, I've been re-reading Joan Didion while making my way from point A to point
B: Slouching Toward Bethlehem, The White Album, and Where I Was From. As it turns out, Joan
Didion is a particularly apt author to be reading on the way to this conference-not because the
conference is being held in Las Vegas, although her four-page summation of this "most extreme
and allegorical of American settlements" is a classic. But rather, because a nearly constant
theme of her writing is change: how hard it is to recognize that things have changed; how hard it
is to come to terms with it once recognized; how insistent people can be that surely, they will be
OK.
And given that introduction, I'm sure you have now guessed what I intend to talk to you about
today: LIBOR, the benchmark formerly known as the London Interbank Offered Rate. LIBOR was
the principal benchmark used to set interest rates for a vast number of commercial loans,
mortgages, securities, derivatives, and other products. For a number of years-certainly at least
since July of 2017, and really for several years before-it has been clear that LIBOR would end,
but some believed it was not clear exactly when LIBOR would end. And, as a result, many market
participants have continued to use LIBOR as if that end date would surely be in some indefinitely
distant future, as if LIBOR would remain available forever.
Earlier this year, however, things changed, and changed significantly. Two things happened
which together make clear that LIBOR will no longer be available for any new contracts after the
end of this year, just 86 days from now. First, the United Kingdom's Financial Conduct Authority
(FCA), which regulates LIBOR, and ICE Benchmark Administration (IBA), which administers
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LIBOR, announced definitive end dates for LIBOR. No U.S. dollar LIBOR tenors will be available
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after June 30, 2023.
So, now there was a definitive and immovable date fixed for the end of LIBOR. However, the
second thing that happened made clear that long before that end date in 2023, LIBOR would not
be available for any new contracts after the end of this year. Following the FCA and IBA
announcements about the end of LIBOR, the Federal Reserve and other regulators published
guidance making clear that we will focus closely on whether supervised institutions stop new use
of LIBOR by the end of this year-86 days from now.
If LIBOR will not be available for new contracts, what is the point of IBA continuing to provide
USD LIBOR quotes until mid-2023? Those LIBOR quotes will allow many existing contracts to
mature according to their terms, thus greatly reducing the costs and risks of this transition.
Otherwise, many banks would have had to re-negotiate hundreds of thousands of loan contracts
before December 31, an almost impossible task. But the whole process only works if no new
LIBOR contracts are written while the legacy contracts are allowed to mature. So, those new
LIBOR contracts will not be made. Change is difficult, but it is inescapable.
What is LIBOR, and Why is it Going Away?
LIBOR was intended to be a measure of the average interest rate at which large banks can
borrow in wholesale funding markets for different periods of time, ranging from overnight to one
month, three months, and beyond. LIBOR is an unsecured rate, which means that it measures
interest rates for borrowings that are made without collateral and therefore include some credit
risk.
At first blush, it may seem peculiar that a borrowing rate for banks in London has been used so
widely. Why, for example, are more than $1 trillion of residential mortgages in the United
States tied to LIBOR? The answer is that, over time, LIBOR's pervasiveness became
selfreinforcing. Lenders, borrowers, and debt issuers relied on LIBOR because, first, everyone else
used LIBOR, and second, they could hedge their LIBOR exposures in liquid derivatives markets.
Today, USD LIBOR is used in more than $200 trillion of financial contracts worldwide.
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Federal Reserve officials have described LIBOR's flaws on numerous occasions. The principal
problem with LIBOR is that it was not what it purported to be. It claimed to be a measure of the
cost of bank funding in the London money markets, but over time it became more of an arbitrary
and sometimes self-interested announcement of what banks simply wished to charge for funds.
That might not have become such a debacle had it been clear to everyone what the ground rules
were, but the ground rules for LIBOR were anything but clear.
As a result of subsequent changes to the process, LIBOR panel banks now provide evidence of
actual transactions where possible. A fundamental problem, however, is that LIBOR has been
unable to separate itself from its perception as a measure of bank funding costs, yet the market
on which LIBOR is based-the unsecured, short-term bank funding market-dwindled after the
2008 financial crisis. This means that, for many LIBOR term rates, banks must estimate their
likely cost of such funding rather than report the actual cost.
Many LIBOR panel banks are uncomfortable estimating their funding costs in producing a
benchmark perceived by many to measure actual funding costs. As a result, the great majority of
the panel banks have determined that they will not continue participating in the process. This is
why the FCA and IBA have announced definitive end dates for LIBOR.
I should note here that regulators have warned about LIBOR-related risks for many years.
Beginning in 2013, the U.S. Financial Stability Oversight Council and the international Financial
Stability Board, which I currently chair, expressed concern that the decline in unsecured
shortterm funding by banks could pose serious structural risks for unsecured benchmarks such as
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LIBOR. To mitigate these risks and promote a smooth transition away from LIBOR, the Federal
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Reserve convened the Alternative Reference Rates Committee (ARRC) in November 2014. As I
will describe further in a moment, the ARRC has worked to facilitate the transition from LIBOR to
its recommended alternative, the Secured Overnight Financing Rate (SOFR).
Supervisory Efforts
In November 2020, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and
Federal Deposit Insurance Corporation (FDIC) sent a letter to the banking organizations we
regulate noting that, after 2021, the use of LIBOR in new transactions would pose safety and
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soundness risks. Accordingly, we encouraged supervised institutions to stop new use of LIBOR
as soon as is practicable and, in any event, by the end of this year. The letter also noted that new
contracts entered into before December 31, 2021, should either use a reference rate other than
LIBOR or have robust fallback language that includes a clearly defined alternative reference rate
after LIBOR's discontinuation.
Recently, a number of institutions have asked what would qualify as "new" use of LIBOR after
2021. We are working with other agencies to provide additional guidance about this issue. In my
view, however, "new" use of LIBOR would include any agreement that creates additional LIBOR
exposure for a supervised institution or extends the term of an existing LIBOR contract.
Earlier this year, the Federal Reserve issued another supervisory letter that provided guidance
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concerning supervised institutions' LIBOR transition plans. As the end of LIBOR approaches,
Federal Reserve examiners have intensified their focus on supervised institutions' transition
planning. In general, institutions of all sizes have acknowledged year-end as the stop date for
new LIBOR contracts and are operationally prepared to offer alternative rates. However, based
on data from the second quarter of 2021, we estimate that large firms used alternative rates for
less than 1 percent of floating rate corporate loans and 8 percent of derivatives. To be ready for
year-end, lenders will have to pick up the pace, and our examiners expect to see supervised
institutions accelerate their use of alternative rates.
Transitioning to Alternative Rates
A handful of firms have said that they may want more time to evaluate potential alternative rates.
There is no more time, and banks will not find LIBOR available to use after year-end no matter
how unhappy they may be with their options to replace it. I would note that the ARRC has been
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publishing tools to facilitate the use of SOFR for almost four years. SOFR is a broad measure
of the cost of borrowing cash overnight, collateralized by Treasury securities. It rests on one of
the deepest and most liquid markets in the world. It is calculated transparently by the Federal
Reserve Bank of New York, engendering market confidence. And it can be used for all types of
transactions. Notably, the ARRC recently recommended SOFR term rates, which will facilitate
the transition from LIBOR to SOFR for market participants who wish to use a forward-looking
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rate. Given the availability of SOFR, including term SOFR, there will be no reason for a bank to
use LIBOR after 2021 while trying to find a rate it likes better.
This is especially true for capital markets products. As I described recently in remarks to the
Financial Stability Oversight Council, it is critical that capital markets and derivatives markets
transition to SOFR. Market participants have expressed nearly universal agreement that this is
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the right replacement rate for such products. The ARRC did not recommend any other rate for
capital markets or derivatives, and market participants should not expect such rates to be widely
available.
Loans, however, are different from derivatives and capital markets products, and raise different
issues. With respect to loans, the Federal Reserve, OCC, and FDIC issued a letter last year
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explaining that we have not endorsed a specific replacement rate. We have not changed that
guidance. A bank may use SOFR for its loans, but it may also use any reference rate for its
loans that the bank determines to be appropriate for its funding model and customer needs. But
a bank will not find LIBOR available after year-end, even if it doesn't want to use SOFR for loans
and hasn't chosen a different alternative reference rate. Reviewing banks' cessation of LIBOR
use after year-end will be one of the highest priorities of the Fed's bank supervisors in the coming
months. If market participants do use a rate other than SOFR, they should ensure that they
understand how their chosen reference rate is constructed, that they are aware of any fragilities
associated with that rate, and-most importantly-that they use strong fallback provisions.
To conclude, I emphasize that market participants should be ready to stop using LIBOR by the
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end of 2021. One-week and two-month USD LIBOR will end in only 12 weeks. The remaining
USD LIBOR tenors will end in mid-2023, but the LIBOR quotes available from January 2022 until
June 2023 will only be appropriate for legacy contracts. Use of these quotes for new contracts
would create safety and soundness risks for counterparties and the financial system. We will
supervise firms accordingly.
Market participants should act now to accelerate their transition away from LIBOR. The reign of
LIBOR will end imminently, and it will not come back. To return to where we started, the year of
magical thinking is over.
S e e www.fca.org.uk/news/press-releases/announcements-end-libor and ir.theice.com/press/news-
details/2021/ICE-Benchmark-Administration-Publishes-Feedback-Statement-for-the-Consultation-on-ItsIntention-to-Cease-the-Publication-of-LIBOR-Settings/default.aspx. Return to text
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One-week and two-month U.S. dollar LIBOR tenors will end as of December 30, 2021. IBA will cease publishing
all remaining U.S. dollar LIBOR rates after June 30, 2023. Return to text
3
See www.federalreserve.gov/newsevents/speech/quarles20190410a.htm, www.federalreserve.gov/newsevents/speech/powell2
and www.federalreserve.gov/newsevents/testimony/vanderweide20210415a.htm. Return to text
4
See Financial Stability Oversight Council, 2013 Annual Report (PDF) (Washington: Department of the Treasury,
2013). See also Financial Stability Board, Reforming Major Interest Rate Benchmarks (PDF) (Basel, Switzerland:
Financial Stability Board, July 2014). Return to text
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The ARRC's voting members are private sector firms, but the Federal Reserve and other official sector entities
serve as ex-officio members of the ARRC. Return to text
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See www.federalreserve.gov/newsevents/pressreleases/bcreg20201130a.htm. Return to text
7
See SR 21-7, "Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR." Earlier
this year, I gave a speech that described this supervisory letter in detail. See
also www.federalreserve.gov/newsevents/speech/quarles20210322a.htm. Return to text
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The Federal Reserve Bank of New York began publishing SOFR in April 2018. Return to text
9
See www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf. Return
to text
10
See www.federalreserve.gov/supervisionreg/files/quarles-libor-presentation-20210611.pdf. Return to text
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See www.federalreserve.gov/supervisionreg/srletters/SR2025.htm. Return to text
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The Federal Reserve recognizes that market participants cannot fix some legacy LIBOR contracts. In particular,
there are approximately $10 trillion of so-called "tough" legacy contracts that mature after LIBOR ends, but lack
workable fallback language to address the end of LIBOR. The Federal Reserve welcomes efforts in Congress to
craft federal legislation that would provide a workable fallback for these contracts. Return to text