It will be another three years before the London interbank offered rate fades into history and is replaced by a new benchmark rate, but bankers are already expressing frustration with what promises to be an arduous transition.

Libor, the rate that banks charge each other to borrow money, is slated to go by the wayside in 2021 and taking its place will be something called the Secured overnight financing rate, or SOFR.

An industry committee overseen by the Federal Reserve that selected SOFR last summer did so with the derivatives market — by far the largest sector tied to Libor — in mind, but many industry observers are concerned that it could cause headaches for banks that primarily focus on traditional lending.

That’s because SOFR is based on overnight repurchase agreements, so it doesn’t reflect longer-term credit risk. Libor, by contrast, is the rate reflects what banks pay to borrow from one another, so it always takes credit risk into account. The result is that the rates, at least right now, vary widely, and if that’s the case when SOFR takes effect in three years, banks could find themselves locked into loans that don’t match up with benchmark rates.

As of May 24, three-month Libor was about 2.3%, while one-month Libor was 1.9%. SOFR, meanwhile, stood at 1.7%.

SOFR “obviously causes a lot of problems for banks because it doesn’t match up with Libor,” said Marc Gottridge, an attorney with Hogan Lovells.

Gottridge said that the “big challenge” facing the industry is to create a synthetic version of Libor. That process has begun with the launch of SOFR futures contracts, which began trading earlier this month. The futures will ultimately be used to establish a term rate — similar to three-month Libor, for instance — for business loans and other products, according to a spokesman for the Fed committee.

But that may not be enough to assuage the concerns of regional bankers.

Bill Sirakos, chief economist at Cullen/Frost Bankers in San Antonio, said he is skeptical of using a SOFR-based rate on commercial loans. The $32 billion-asset company, notably, has been a supporter of the American Financial Exchange — a private, interbank loan market that is creating a competing benchmark, known as Ameribor.

“That futures contract reflects what you think is the overnight cost of money is in 90 days — it doesn’t reflect 90-day money,” Sirakos said.

“It’s a guess index, and if I’m a lender, I’m going to want something more certain than that," he said.

It also irks executives at smaller banks that the Fed committee’s roster is made up primarily of representatives from large financial institutions. After selecting SOFR last year, the committee reconvened in March and added the Independent Community Bankers of America to its roster — a move Sirakos and other regional bank representatives viewed as too little, too late.

“This is all controlled by the big boys,” Sirakos said.

Central bankers, meanwhile, have begun emphasizing the urgency for bankers to plan for the end of Libor. During a forum in London on May 24, William Dudley, the outgoing president of the Federal Reserve Bank of New York, urged financial institutions to move quickly to transition to a new benchmark.

“Time is of the essence, and we must manage it well,” Dudley told a Bank of England forum.

The U.K. Financial Conduct Authority started the clock last summer, saying that it would begin phasing out Libor at the end of 2021. Andrew Bailey, the CEO of the FCA, said at the time that underlying market of interbank loans, which has largely dried up since the financial crisis, was not large enough to support the benchmark.

The rate “depends excessively, in our view, on the expert judgement” of a group of large banks on the Libor panel, Bailey told Bloomberg in July.

Libor is perhaps best known to the public as the topic of a blockbuster scandal in 2012, when bankers were discovered to have been manipulating the rate.

The most immediate challenge facing the banking industry, according to Gottridge, is ensuring that the language used in loan contracts contains fallback language outlining what rate would be used if Libor is not available. Reviewing language in contracts that extend beyond 2021 will be particularly crucial.

“See if it’s sufficiently robust,” Gottridge said, noting that it should protect the bank from litigation.

In some cases, banks may have to work with individual borrowers to negotiate amendments to the underlying language in their loans, he added.

Chris Cole, senior regulatory counsel at the ICBA, said the group joined the Fed committee, in part, to help small banks navigate the complicated process of reviewing contract language.

“Our objective with being on the committee is to make sure that community banks have a soft landing, so to speak, if we do begin using a SOFR rate,” Cole said.

While there are multiple alternatives to Libor, the industry will likely end up using the same reference rate over the long term — likely SOFR, said David Greiwe, treasurer at the $20 billion-asset MB Financial, which last week announced that it was selling itself Fifth Third Bancorp.

The reason, he said, is because a will have a hard time getting a piece of a loan syndication if it’s using Ameribor or some other reference rate and the lead bank is using SOFR.

Indeed, one of the reasons why many smaller banks across the industry adopted Libor in the first place, in the 1980s, was to participate in syndicated loans, Greiwe said. Previously, banks had previously used their prime rates as the basis for their commercial loans, which made syndications difficult.

“Libor solved that problem,” Greiwe said.

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