LIBOR Transition Update
Introduction
The following information is intended to help our clients better understand the transition from LIBOR to an alternative benchmark interest rate. In 2017, banking regulators announced the phase-out of LIBOR with a goal of replacing it with a more reliable and robust benchmark. More recently, on March 5, 2021, the Financial Conduct Authority (FCA) formally announced the future ceasing of and loss of representativeness of LIBOR. Prosperity Bank is well on its way to making this transition and will cease using LIBOR for any new or modified transactions by no later than the end of this year (2021).
LIBOR Transition - Frequently Asked Questions (FAQs)
What is LIBOR?
The London Interbank Offered Rate (LIBOR) is also often referred to as the LIBOR index or LIBOR rate. LIBOR is one of the most important interest rate benchmarks in the world and is widely used to establish the rate to be paid on many variable-rate and short-term financial instruments. These include commercial loans, mortgages, derivatives, student loans, bonds, credit cards and interbank products. Fifteen LIBOR maturity terms ranging from overnight-to one year are currently being reported and used globally on a daily basis for transactions based in US dollars and other major international currencies.
How is LIBOR calculated?
LIBOR is based upon a survey of leading international banks. The banks report how much it would cost them to borrow in U.S. dollars from another bank on an unsecured, short-term basis. These reported borrowing costs do not necessarily have to be based on actual transactions and may be estimated within certain defined parameters. The reported rates are compiled and published daily by the Intercontinental Exchange (ICE).
Why is LIBOR being discontinued?
Originally, LIBOR was created to reflect the cost at which large, globally active banks could borrow on an unsecured basis in wholesale markets. LIBOR, first used by commercial banks in the late 1960’s, came under the governance of the British Banking Association (BBA) in the mid-1980’s, when unsecured lending among London banks was commonplace. However, market conditions evolved making such borrowings less-and-less frequent. In the wake of regulations put in place after the 2008 financial crisis, the volume of such transactions declined dramatically. Thus, the LIBOR rate setting process became increasingly reliant on estimates rather than actual transactions, leaving it much more susceptible to manipulation. Simply put, LIBOR has over time become much less representative of the markets it was originally meant to reflect.
What is the timing of this Libor transition?
An industrywide timeline has already been established by the US banking regulators for the LIBOR transition. On November 30, 2020, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) warned that the issuance of new LIBOR-based contracts after December 31, 2021, could present safety and soundness risks to banks. Therefore, new transactions may not use LIBOR after 2021, and most existing transactions must be amended to transition to an alternative on or before July 1, 2023. In addition, it is important to note that the actual timing of a changeover may be significantly influenced by unique language or transition terms contained within the existing loan documents.
Will Prosperity Bank customers be impacted by the cessation of LIBOR?
Prosperity Bank customers with existing commercial and consumer loans, leases, residential mortgages, interest rate derivatives, and student loans that reference (or could reference) a LIBOR-based benchmark interest rate will be impacted by the cessation of LIBOR. There is no ability on our part to “opt out” of this transition or extend the deadlines mentioned above. On the other hand, this transition will not affect transactions that do not reference LIBOR such as variable-rate loans based upon the Prime rate or other rate indices. In any event, customers are encouraged to reach out to their Prosperity Bank Relationship Manager with any questions or concerns.
What it is the next step in this transition?
If you have a LIBOR-based loan with Prosperity Bank, you will be receiving more specific guidance from the Bank in the near future, if you have not already been contacted. During the second half of 2021, Prosperity Bank will cease offering LIBOR as a pricing benchmark for new loans, loan renewals or maturity extensions. Please be assured that this transition is a high priority for the Bank. It will be handled on a customer-by-customer basis with a goal of being as transparent as possible to avoid undue confusion and minimize disruptions.
Still Have Questions?
If you have any questions or would like additional information concerning the replacement of LIBOR, please contact your Relationship Manager and refer to this website for future updates. Prosperity Bank is committed to keeping its colleagues, partners and customers informed as to how the transition from LIBOR to a replacement interest rate index will impact them.
Important Note
PLEASE BE AWARE, THERE COULD BE CHANGES TO THE INFORMATION SET FORTH ABOVE (COLLECTIVELY, THE “INFORMATION”) AT ANY TIME, FROM TIME TO TIME, AND AS A RESULT, THE INFORMATION IS SUBJECT TO CHANGE WITHOUT NOTICE. BY PROVIDING YOU WITH THE INFORMATION, THE BANK IS NEITHER UNDERTAKING AN OBLIGATION TO UPDATE THE INFORMATION, NOR IS THE INFORMATION PROVIDING ANY LEGAL, FINANCIAL, ACCOUNTING, TAX OR INVESTMENT ADVICE UPON WHICH YOU SHOULD RELY TO MAKE DECISIONS. YOU SHOULD REACH YOUR OWN CONCLUSIONS AND DECISIONS IN CONSULTATION WITH YOUR OWN LEGAL AND FINANCIAL ADVISORS WITH RESPECT TO ANY IMPACT THAT THE INFORMATION MAY HAVE ON ANY FINANCIAL ARRANGEMENTS TO WHICH YOU ARE A PARTY OR OTHERWISE.
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