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.
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 the 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?
Danske Bank UK has been fully engaged in the industry’s preparations to ensure a smooth and effective transition for customers.
We will be in contact with our customers impacted in the coming months.
Are other currencies affected?
Yes, alternative interest benchmarks have been selected for currencies within the Eurozone and in the USA.
What are the key differences between IBOR and replacement RFR benchmarks?
IBORs are forward looking rates that embed credit risk and are available in longer periods than overnight, for example one week, one, two, three, six and twelve months. LIBOR rates can be used as term rates where the rate is fixed in advance for that term. RFRs are backward looking overnight rates which are generally viewed as riskless or near risk-free.
The replacement reference rates that Danske Bank will use will depend on the product and the individual customers.
How will it impact me or my business?
Given the use of the LIBOR reference rates in relation to many financial products, the transition from them could have a financial and operational impact on your business. It is important that you understand how this may affect you.
What can I do now?
- Identify which products you have that reference LIBOR;
- Identify which products mature after the end of 2021;
- Review alternative reference rates and their benefits and drawbacks for you;
- Consider how the transition may affect your systems, accounting and tax matters.
We strongly encourage you to stay up-to-date on the latest developments and to consider how these changes will impact your business using independent professional service providers (legal, accounting, financial, tax or other) as appropriate. You may also want to consider raising questions of, and expressing views to, relevant industry bodies, trade associations and working groups, including responding to public consultations whenever possible.
You can also contact your Relationship Manager for further information if required.
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: