In 2017, global banking regulators - including the UK’s Financial Conduct Authority (FCA) - announced significant changes to benchmark interest rates. Benchmark interest rates have been fundamental to the financial industry for decades and banks use them to price their products and services. These include relatively straightforward products such as loans, overdrafts and deposits. They are also used as the basis for more complex products such as securities and derivatives. The London Inter Bank Offered Rate (LIBOR) is one of the most widely used benchmark interest rates in the UK. In 2017, the FCA signalled its intention to encourage the UK financial services industry to take action to stop using LIBOR after the end of 2021.
Changes to the LIBOR reference rates
The upcoming phase-out of the interbank reference rates (IBORs) in favour of alternative risk free reference rates (RFRs) means notable changes in the global financial system. The aim of the new RFRs is to make sure that, in the future, reference rates will be transaction based and more transparent in order to create a more fair, robust and reliable market.
What is happening?
What is LIBOR?
LIBOR is a benchmark interest rate that is set on a daily basis by a panel of banks. Each bank submits interest rates at which it would offer to lend money to other banks. These rates are provided for different periods that range from ‘overnight’ to a period of up to twelve months. Using a defined method, an average of the rates submitted by contributors is calculated and the LIBOR interest rates for each agreed period is made publically available every working day by an appointed administrator.
Why is this change being made?
The FCA has an objective to protect the integrity of the financial services industry. It has proposed to replace LIBOR benchmark interest rates with new “Risk Free Rates”. These benchmark interest rates differ from LIBOR as they will be based on actual transactions in active markets with prices driven by supply and demand. As a result, they will have minimal reliance on expert judgement from contributing banks. These new Risk Free Rates, and other widely used benchmark interest rates, are likely to be used to replace LIBOR across the range of impacted products.
When will this change take place?
The Bank of England and the FCA has stated that from 31 December 2021, banks will no longer be compelled to provide LIBOR quotations. This means that the setting of this key benchmark interest rate will likely be discontinued.
What is Danske Bank UK doing?
Work is currently underway across the financial services industry to replace LIBOR interest rates and manage the transition to these new Risk Free Rates. Whilst the effects of the transition are not yet fully clear, Danske Bank UK is fully engaged in the industry’s preparations to ensure a smooth and effective transition for customers and will continue to monitor developments.
How will it impact me or my business?
LIBOR benchmark interest rates are most commonly used by Business and Corporate customers across many different products. Our priority is to ensure a smooth transition to the new benchmark interest rates in line with industry standards. We will be in touch with you directly if these upcoming changes impact you. For instance, this may occur if you have LIBOR-linked products that are due for renewal or if you require new products impacted by this change. You don’t need to do anything just yet. However, you may want to consider whether you require guidance from professional advisors on the possible implications of the upcoming changes from a financial, legal, accountancy or tax perspective.
We will intermittently update this Page with communications relating to these changes. In the interim if you require more general information on interest rate reform & LIBOR please see below useful links: