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The reprieve on Libor won’t last forever. Lenders need to prepare.

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The headlines and whispers about delaying the transition away from the London interbank offered rate keep cropping up, and recent developments only add fuel to the fire.

The Financial Conduct Authority has relaxed some of the transition timetables to the Sterling Overnight Index Average in England. The Federal Reserve has selected the Libor over its new alternative, the Secured Overnight Financing Rate, for pricing its Main Street Lending Program in response to the coronavirus pandemic.

And the pandemic has forced banks to manage competing priorities, shifting resources away from their Libor-transition efforts to focus on their business-continuity plans and organizational resilience. As a result, many banks are falling further behind on their transition plans. Many hope or even expect that the pandemic will force the regulators’ hands to adjust the Libor timelines.

And yet, the regulators — in both the United Kingdom and U.S. — have made it clear that the December 2021 deadline to transition away from Libor holds firm, as of now. And they are encouraging banks to move with greater pace on executing their transition plans.

While many ponder Libor’s renewed resilience, the financial services industry is missing the bigger challenge: It’s not a matter of whether the transition will be further delayed, but whether banks will take the steps to truly be ready when the market gets there.

It’s time that bankers shift their attention away from regulatory relief and focus on the level of detail required to successfully reach the expected Libor milestones. There is still adequate time for banks to make the pivot. Here are three things bankers absolutely must do in the coming months:

First, bankers need to lock in their talent.

There is an expected shortage of resources in areas such as contract management, technology, legal and analytics. Banks also aren’t giving enough thought to the client outreach portion of their plans and the resources they will need to help educate clients prior to commencing commercially sensitive negotiations.

Second, banks need to get their technology strategy ready.

Regardless of which platforms or outside technology vendors that banks use for the transition, they need to make sure the co-dependent and upstream technologies are also ready. This includes ensuring loan origination and servicing, collateral monitoring and loan accounting systems are compliant.

There will absolutely be logistical challenges and delays as banks adopt and test new technology. Bankers need to account for this time in their transition plans and implement interim workarounds.

Third, banks need to transition into execution mode.

For example, what does it look like when banks use new rates and how do their operational systems work? Banks will also need to evaluate what new products should be issued using the new rates, and what product design conventions are best suited for that offering.

Firms will need to identify system replacement costs, reconcile data, rebalance portfolios and manage multiple rates. In addition, they will need to remediate all existing legacy contracts that are in effect beyond 2021.

Overall, banks must keep the focus on execution, regardless of when and what is going on in the world, as it’s not a turnkey operation to handle both front-and-back books with the new rates.

If banks have not made progress in these areas in the coming months, then the windows for operational readiness will shorten dramatically, and the access to critical skills will only get tighter.

There are significant risks related to the transition that banks need to better understand and mitigate, including through the establishment of resilient control and oversight functions.

While it’s uncertain what the regulators will do next with the Libor transition, it’s a risky bet to assume there’s more time than currently granted.

Slowing the transition is akin to trying to put a genie back in the bottle. Markets are too far down the path to go back up the hill as the Libor rate has already started to destabilize.

Now is the time for banks to put in place the processes and technologies that will enable a smooth transition to risk-free rates and mitigate any conduct risks that may arise.

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LIBOR SOFR Main Street Lending Program Compliance Coronavirus
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