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The Secured Overnight Financing Rate has benefited amid the phaseout of Libor from positive comments by regulators. Is a multirate environment, which some banks would prefer, still possible?
The Secured Overnight Financing Rate has benefited amid the phaseout of Libor from positive comments by regulators. Is a multirate environment, which some banks would prefer, still possible?
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By John Hintze
In March 2021, the administrator of the London Interbank Offered Rate made it official: certain tenors of U.S. dollar Libor would cease to publish on Dec. 31, 2021, with remaining settings terminating on June 30, 2023, for legacy transactions. With the long-telegraphed Libor endgame now set in stone, banks are picking up the pace of transition amid front- and back-end challenges.
One concern held by community, midsize and regional banks that use Libor is that the Secured Overnight Financing Rate, the favored alternative of the Alternative Reference Rate Committee, a public-private group convened by the New York Fed, is that it does not reflect credit risk. In times of market stress, investors flocking to the risk-free rate would cause it to plummet, along with the banks’ returns on SOFR-priced loans, while their cost of funds jumps a bank nightmare.