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A man researching changes regarding LIBOR
The End of LIBOR

Does the end of the London Interbank Offered Rate (LIBOR) affect you and your loans?

See Our FAQs

The Transition Away From LIBOR

The U.S. financial system is undergoing a massive and complex transition away from the London Interbank Offered Rate, commonly known as LIBOR. LIBOR is a benchmark interest rate that is referenced in trillions of dollars of financial contracts, such as business and consumer loans, interest rate derivatives, and floating rate notes. Work and planning on this transition away from LIBOR has been underway for the past several years, and now the end of LIBOR is fast approaching.

As a client of Old National Bank, we want to assure you that we stand ready to answer your questions and partner with you as we work through this transition together. The following FAQ guide is meant to help answer commonly asked questions about the move away from LIBOR. If you have specific questions about how this transition will affect you, please reach out to your Old National relationship manager.

LIBOR Frequently Asked Questions

A: LIBOR was introduced in the 1980’s as a benchmark interest rate that was intended to reflect banks’ average cost of short-term, wholesale unsecured borrowing. Over time, and particularly during the financial crisis that began in 2007, banks became less and less reliant on inter-bank lending. As a result, the number and dollar volume of transactions from which LIBOR was derived declined dramatically. To make up for this shortfall, LIBOR panel banks resorted to using “expert judgment” when submitting various rates used in calculating LIBOR. This left it susceptible to manipulation and fraud.

In 2017, the UK Financial Conduct Authority (FCA), the regulator for LIBOR, announced that after December 31, 2021, the panel banks would no longer be required to submit settings for LIBOR. (This has since been revised to June 30, 2023, for most LIBOR tenors.) This announcement effectively started the countdown to the end of LIBOR.

A: There are two main deadlines for the discontinuance of LIBOR. First, the banking regulators including the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (Fed) and Federal Deposit Insurance Corporation (FDIC), had directed banks to stop using LIBOR in new financial contracts as soon as practicable, but no later December 31, 2021. Secondly, for all existing contracts that mature after June 30, 2023, LIBOR will need to be replaced with a new benchmark interest rate.

A: If your loan contract references LIBOR, then this transition affects you. We would suggest reviewing your documents to see if LIBOR is used as the reference rate or contact your Old National relationship manager who can assist you.

A: Although options for replacing LIBOR continue to evolve, Old National has currently identified the following potential replacement options for our clients:

  1. Secured Overnight Financing Rate (SOFR)
  2. Term SOFR

The Secured Overnight Financing Rate or SOFR is the replacement benchmark recommended by the New York Federal Reserve’s Alternative Reference Rate Committee (ARRC). (See references below for more information on the work of the ARRC.) SOFR is derived from transactions that are executed in the overnight repurchase agreement (repo) market. These transactions are executed between banks and other intermediaries and are often collateralized by US Treasury securities. The market for SOFR is very deep and liquid with nearly $1 trillion in underlying transactions executed daily. 

While SOFR has been identified as the replacement index for LIBOR, there are multiple calculation methodologies which have been developed given that SOFR is a daily rate. The CME Term SOFR Reference Rates benchmark is a daily set of forward-looking interest rate estimates based on the SOFR futures contracts. CME Term SOFR Reference Rates are calculated and published for 1-month, 3-month, 6-month and 12-month tenors. Like LIBOR, CME Term SOFR Reference Rates are forward-looking, and the rate is set at the beginning of the period and interest is paid in arrears.

A: Old National has thoroughly analyzed and evaluated replacement benchmarks. Our goal is to provide you several sound options since one size does not fit all. The replacement benchmarks noted above have different characteristics, advantages, and disadvantages. Your Old National relationship manager will work with you to decide which alternative best fits your needs.

A: As mentioned above, on June 30, 2023, LIBOR will cease to exist as a reference rate in all financial contracts. This means that all existing loans referencing LIBOR will automatically convert or “fallback” to a new, replacement benchmark. Old National will be following industry standards, including guidance provided by the US Adjustable Interest Rate (LIBOR) Act, which has identified the process as well as “fallback” index to be utilized. Old National will notify you of the new replacement benchmark selected for your loan.

A: Yes, possibly. One of the overarching goals of the LIBOR transition is to ensure that there is no “value transfer” between two parties to a contract simply because the benchmark interest rate has changed. Since no replacement benchmark is the same as LIBOR, it is possible that a “spread adjustment” will be required to ensure there is no value transfer from one party to the other.

Your Old National relationship manager will be able to answer any specific questions you may have about a spread adjustment that may be required on your loan.

A: For more information about the ARRC: https://www.newyorkfed.org/arrc 

For more information about SOFR: https://www.newyorkfed.org/markets/reference-rates/sofr

For more information about Term SOFR: https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html

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