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LIBOR Transition FAQs

1. What is LIBOR?

The London Interbank Offered Rate (LIBOR) is a benchmark variable interest rate that major global banks have historically used to lend to one another, published daily by the Intercontinental Exchange Benchmark Administration (ICE). For many years, LIBOR has been the dominant benchmark rate for determining interest payments on variable rate financial products. At its peak, there were trillions of dollars of loan and derivatives contracts tied to LIBOR.

The methodology for calculating LIBOR has remained largely unchanged since it was introduced. Each day, a group of large banks, known as “panel banks,” report their funding rates to ICE, which averages, adjusts, and publishes those rates on a daily basis.


2. What is the LIBOR transition?

The “LIBOR transition” references the discontinuation of LIBOR and the transition of financial products away from LIBOR-based rates.


3. Why is the LIBOR transition happening?

The LIBOR transition is happening because there were two main concerns with the LIBOR calculation process:

  • First, there has been a significant decline in the sample size for calculating LIBOR since the 2008 financial crisis. Fewer panel banks have been reporting, and those that do report fewer quotes based on market transactions. Instead, LIBOR has increasingly relied on what ICE calls "market and transaction data-based expert judgment." Therefore, concerns were raised about how well LIBOR reflects market realities since it is not based on actual market transactions.
  • Second, LIBOR’s reliance on inputs from panel banks opened it to manipulation, and there have been a range of irregularities uncovered by regulators, which have led to large fines for those involved.

As a result, global regulatory initiatives have sought to develop alternative reference rates and to discontinue the use of LIBOR.


4. When will LIBOR rates no longer be available?

ICE has confirmed that most tenors of U.S. Dollar LIBOR (including one-month LIBOR, the tenor most frequently used for business loans) will not be published on a representative basis after June 30, 2023. One-week and two-month LIBOR have not been published since December 31, 2021. Federal banking regulators have instructed banks to stop originating new LIBOR loans (and to cease entering into any amendments that would increase the amount or extend the maturity date of existing LIBOR loans) no later than December 31, 2021.


5. Are regulators mandating a specific replacement for LIBOR?

No. Federal bank regulators have issued a joint statement stating that the regulators do not intend to recommend a specific rate for use in place of LIBOR. The agencies recommended that financial institutions “use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs.” Different financial institutions may conclude that different alternative rates may be better or worse for their particular institutions and customers, and replacement rates could also vary by product type.


6. What are possible replacement rates for LIBOR?

Many different rates have been considered as replacement indexes by different institutions, with varying levels of market acceptance. Potential replacement and alternative rates include Wall Street Journal Prime, SOFR, and BSBY.


7. What is SOFR?

The Secured Overnight Financing Rate (SOFR) represents the interest rate that banks impose on each other in making loans secured by U.S. treasuries. SOFR is a daily, overnight, secured, risk-free rate, released by the Federal Reserve every morning. SOFR may include:

“Daily Simple SOFR” or “Average SOFR in Arrears” is a “lookback” rate based on daily SOFR rates that have occurred prior to the relevant interest accrual period, and can include an average of the daily SOFR rate for each day over the preceding period (for example, one month).

“Term SOFR” is a forward-looking rate representing a projection of what daily SOFR will be on a certain date in the future.

Unlike LIBOR, which is a forward-looking, credit-sensitive rate meant to reflect a bank’s cost of capital, SOFR measures rates applicable to short-term, secured financing. Because SOFR is secured and risk-free, while LIBOR is unsecured, SOFR has historically been (and can be expected to be) a lower rate than LIBOR, which means it may require a spread adjustment if used as a replacement to a LIBOR-based loan.

ARRC Recommended Rate

The Alternative Reference Rates Committee (ARRC), a group convened by the Federal Reserve Bank of New York, has recommended SOFR as a LIBOR alternative.


8. What is BSBY?

The Bloomberg Short-Term Bank Yield Index (BSBY) is a proprietary, credit-sensitive index, that incorporates bank credit spreads and calculates a forward term structure. BSBY seeks to measure the average yields at which large global banks accessed USD senior unsecured marginal wholesale funding. The index is based on aggregated anonymized data anchored in transactions and executable quotes sourced from Bloomberg’s electronic trading solutions and trades of short-term senior unsecured bank corporate bonds reported by FINRA.

Despite ARRC’s recommendation of SOFR as the primary replacement of/alternative to LIBOR, some financial institutions and customers prefer BSBY as a replacement rate, particularly because of its nature as a credit-sensitive, forward-looking term rate that has historically behaved very similarly to LIBOR.

Comparison of BSBY v. LIBOR

  • Both reflect market lending costs
  • As forward-looking rates, both anticipate policy rate moves

Comparison of BSBY v. SOFR

  • Both are based on significant transactional volume (though SOFR’s volume far exceeds that of BSBY)
  • Neither is reliant on expert judgment
  • As a forward-looking term rate, both BSBY and Term SOFR endeavor to anticipate policy rate moves in advance. As an overnight rate, Daily Simple SOFR or Average SOFR in Arrears reflect rate moves after the fact.
  • SOFR s based on secured repo transactions, and will respond to liquidity changes in that market. BSBY will respond to conditions in financial markets that affect pricing of short-term funding sources.


9. Which of these replacement rates will First Commonwealth be using?

Business Loans - After carefully monitoring market developments and acceptance, and subject to ongoing regulatory guidance expected to be released throughout 2022, First Commonwealth Bank (FCB) currently plans to follow the ARRC’s replacement rate and spread adjustment recommendations to transition most of the commercial loans in the bank’s portfolio in 2023. That is, FCB intends to use 1-month Term SOFR plus a spread adjustment of up to 0.0011448% as our primary replacement rate and spread adjustment for business loans that were priced using 1-month LIBOR. While this Adjusted Term SOFR will serve as the replacement rate for FCB’s business loans whose rates have not otherwise been transitioned prior to June 30, 2023, affected business loan customers who would prefer to use alternative replacement rates are encouraged to reach out to their relationship managers to discuss their options. Both SOFR and BSBY are available for pricing new business loans, or for pro-actively transitioning existing LIBOR loans via amendments executed prior to June 30, 2023.

Derivatives Products – LIBOR-based business loans that are subject to interest rate hedges, swaps, or other derivatives products will require coordination in advance of the June 30, 2023 transition deadline in order to transition both the underlying loan product and the derivative product to replacement rates that maintain the economic effect of “fixing” variable rate loan products with as little cost and disruption to the customer and bank as possible. Customers with loans tied to derivatives products will be hearing from their relationship manager to discuss transition steps during the summer of 2022.

Consumer Adjustable Rate Mortgages - We are currently finalizing our replacement rate plans for consumer adjustable rate mortgage loans currently priced with reference to LIBOR. We are monitoring guidance from ARRC and the Federal mortgage agencies (e.g., Fannie Mae) as well as the development and market acceptance of a 1-year forward-looking Term SOFR rate, as we make and implement our decision for transitioning these loans. ARRC is expected to develop any and all remaining final details of its recommended fallback rates for consumer products in the summer of 2022.


10. What happens to my existing LIBOR-based loan?

LIBOR-based loans that mature after June 30, 2023 will need to be transitioned to an alternative fallback rate (see #9 above for more information on fallback rates).  Affected customers can expect to receive written notice during the first quarter of 2023 describing the details of the transition and any required actions.  Affected business loan customers who would prefer to use specific alternative replacement rates are encouraged to reach out to their relationship managers to discuss their options.


11. What about LIBOR-based loans that are subject to a Swap, hedge, or other rate management derivative product?

Swaps and other derivative products define the index rate used separately from the underlying loan documents, and those currently referencing a LIBOR index will also need to be revised to use an alternate index rate when LIBOR becomes unavailable. For the derivatives products to function as intended to manage interest rate risk, the replacement index in the derivatives product should match the replacement index used in the underlying loan transaction. Existing LIBOR-based derivatives (and their related loans) can be transitioned either to a BSBY or Term SOFR index. This transition will need to occur prior to June 30, 2023, and customers with these products can expect to hear from their relationship managers about the transition during the summer of 2022.


12. Will the LIBOR transition affect loans that are priced at an ICE Swap Rate?

Yes. For some loan transactions that use long-term (multi-year) repricing mechanisms, we utilize the ICE LIBOR SWAP Rate, which is based upon underlying LIBOR-rate derivatives transactions, and thus indirectly linked to LIBOR. ARRC and ICE have announced that there can be no certainty or guarantee that these ICE LIBOR Swap Rates will be published after publication of LIBOR is discontinued on June 30, 2023. In late 2021, ICE launched a new version of the ICE SWAP Rate that is based on underlying SOFR-based transactions, rather than LIBOR-based transactions, which (subject to appropriate adjustments) could potentially be used as a replacement. The LIBOR transition will only affect SWAP Rate loans that are subject to repricing after June 30, 2022; loans that are fixed based on a SWAP Rate as of an earlier date of determination would not be affected. Letters have been sent to clients with loans set to reprice based on a SWAP Index on or after January 1, 2022 in order to incorporate more robust fallback language, and we will be reaching out to affected customers in the coming months with more information about how their loans will be affected.