On the compliance horizon: The end of LIBOR
Fortunately, there is still some time to consider which alternative index to use.
An upcoming challenge for credit unions is the 2023 finale of the U.S.-dollar London Interbank Offer Rate, historically one of the most popular indexes for adjustable-rate loans, which has also played a role in interest-rate risk in the past.
When the financial markets became overheated in the mid-2000s and banks couldn’t tell who was solvent, LIBOR increased by more than 400 basis points, triggering loan defaults, bankruptcies and government interventions. It stayed volatile until early 2009, when federal support to the financial system stabilized it, reports CU attorney Michael Edwards, based in Upper Marlboro, Maryland.
LIBOR had failed as a stabilizing foundation for floating-rate lending, he notes. When a subsequent scandal revealed that big derivatives traders were getting banks to manipulate LIBOR in their favor, its days were numbered.
Still, some form of LIBOR—three-month and 12-month—will be around until June 2023. That gives CUs with LIBOR-indexed floaters some time to prepare for a situation, he notes.
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