WITH 15 months left, the majority of the financial institutions are prepared to transition to alternative credit rate benchmarks from the incumbent interbank offered rates (IBORs), according to a survey by Moody’s Investors Service.
The debt watcher said it surveyed 85 banks and nonbank financial institutions (NBFIs) across the globe this year to know their plans amid the phaseout of IBORs by end-2021.
“Most banks [75 percent] and NBFIs [82 percent] say their transition plans are on track and that
Covid-19 [coronavirus disease 2019] will not delay the IBOR phaseout,” Moody’s said.
This was an improvement, the credit rating agency firm said, stressing that only around two-thirds of the banks and one-third of the NBFIs had transition plans last year.
On the other hand, 27 percent of the banks and 18 percent of the NBFIs said they are still behind in some aspects of the transition plans because of the coronavirus-related delays.
Moody’s stressed, however, that communication with stakeholders is deemed crucial, noting that transition cost is something that the banks and NBFIs should discuss with the borrowers. Majority of them expect to split the cost with the clients or fully absorb the expenses to avoid reputational risks.
Currently, most of the surveyed financial institutions are making inventory of the IBOR-linked contracts to prepare their amendments.
“A majority have also adopted communication plans, though most client engagement will start once final fallback protocols are available,” Moody’s said.
Around 60 percent of the surveyed banks, meanwhile, have issued floating-rate debt linked to alternative reference rates (ARRs) in 2020 from just 20 percent in the previous year.
Apart from this, the banks’ exposure to Sterling Overnight Index Average (SONIA) increased this year as well.
“However, surveyed NBFIs have not made any progress issuing floating-rate debt indexed to ARRs,” Moody’s said, noting that only two pension funds issued short-term secured overnight financing rate—another interest benchmark—paper.
RCBC Chief Economist Michael L. Ricafort, in an earlier interview with the BusinessMirror, said the local banking industry has been preparing for the imminent transition in recent years. Should the transition go accordingly, he said the impact would be “minimal.”
S&P Global Ratings Analyst Nikita Anand said the local financial system may not find it too difficult to adapt to the new interest rate benchmark because of its low exposures on IBOR-linked instruments.
Fitch Ratings Director for APAC-Banks Willie Tanoto, meanwhile, stressed the need for a thorough review of the banks’ current contract portfolio to measure and manage exposures.
“In addition, a host of systems and procedures need to be in place, from updated loan and trading systems and software, administrative and accounting systems, risk management modelling adjustments, updated legal procedures, regulatory reporting, internal staff training, external customer education and so on,” he said.