It is widely expected that, as of December 31, 2021, the London Interbank Offered Rate (LIBOR), a common benchmark interest rate used in many lending transactions across the banking industry globally, will cease to exist. While planning for the transition away from LIBOR is already under way, the sudden and growing effects of the coronavirus disease (COVID-19) pandemic on the global economy and continuing uncertainty as to the duration and severity of those effects are causing many to ask whether the timing of LIBOR transition may also be affected.
Currently, LIBOR transition planning is continuing even as banks and financial services companies address the impacts and threats of the COVID-19 outbreak. It is possible, however, that if disruptions to the financial system worsen, a continuance of the LIBOR cessation date may become necessary to prevent additional uncertainty and instability in the markets and across regulated and non-regulated financial institutions.
It is unclear at this time if or how a delay of LIBOR cessation would be achieved, what form a delay would take and if it would occur across all jurisdictions. Likely factors to be considered by global regulators in assessing such a continuance would be the need to divert significant regulatory and bank resources to more urgent issues of capital, liquidity, and loan portfolio management, particularly if the COVID-19 outbreak results in a deep economic downturn or a tepid economic recovery. Regulatory relief or legislative action also could be incorporated into the LIBOR transition process to promote greater certainty and stability across markets. For example, on March 6, 2020, the Alternative Reference Rates Committee (ARRC) released a legislative proposal for the State of New York to consider for the purpose of increasing legal certainty associated with LIBOR transition. It remains uncertain whether the COVID-19 outbreak will deepen the need for a legislative solution or whether the outbreak and its fallout will divert the attention of legislators to more immediately pressing matters.
At this point, however, it is unclear whether or when such changes might occur, so financial institutions and their regulators should continue to proceed with LIBOR transition planning and implementation.
Please visit our Coronavirus Resource Center and subscribe to our mailing list to receive alerts, webinar invitations and other publications to help you navigate this challenging time.