Virtual Hearing - The End of LIBOR: Transitioning to an Alternative Interest... (EventID=111448)

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On Thursday, April 15, 2021, at 2:00 p.m. (ET) Investor Protection, Entrepreneurship, and Capital Markets Subcommittee Chairman Sherman and Ranking Member Huizenga will host a virtual hearing entitled, “The End of LIBOR: Transitioning to an Alternative Interest Rate Calculation for Mortgages, Student Loans, Business Borrowing, and Other Financial Products."

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Witnesses for this one-panel hearing will be:

• Dan Coates, Senior Associate Director, Office of Risk Analysis and Modeling, Federal Housing Finance Agency
• John Coates, Acting Director, Division of Corporation Finance, Securities and Exchange Commission
• Brian Smith, Deputy Assistant Secretary for Federal Finance, U.S. Department of the Treasury
• Mark Van Der Weide, General Counsel, Board of Governors of the Federal Reserve System
• Kevin Walsh, Deputy Comptroller, Market Risk Policy, Office of the Comptroller of the Currency
Overview

The London Interbank Offered Rate (LIBOR) is a daily reported reference rate at which large banks indicate that they can borrow short-term wholesale funds from one another on an unsecured basis. In order to calculate the LIBOR, a “self-selected, self-policing committee of the world’s largest banks” self-report their daily estimated borrowing costs to the Financial Conduct Authority (FCA), the UK financial regulator. As of the 4th quarter of 2020, it is estimated that there are $223 trillion in outstanding exposures to USD LIBOR.

The LIBOR’s self-reporting structure has created opportunities for individuals or institutions to manipulate or falsify data. In the wake of the 2008 financial crisis, upon discovering a widespread culture of LIBOR manipulation built around industry relationships, U.S. and U.K. regulators settled with various banking institutions, including some of the world’s largest banks such as Barclays, JP Morgan Chase, Citigroup, and UBS over allegations that these institutions manipulated the LIBOR by pressuring their colleagues to report artificially low or artificially high interest rates in order to manufacture trading opportunities.

Though its decision was not explicitly linked to the numerous LIBOR rigging scandals, the FCA announced in 2017 that it would no longer compel banks to report LIBOR after December 31, 2021 and would discontinue its publication. However, in response to the global COVID-19 pandemic, the ICE Benchmark Administration (IBA) announced that it would not cease publication of the overnight and 1, 3, 6, and 12 months USD LIBOR settings until June 30, 2023.

The Treasury Department’s Financial Stability Oversight Council (FSOC) has identified the “cessation of degradation of LIBOR” as having the potential to “significantly disrupt” financial markets. FSOC has also expressed concerns that if market participants fail to “adequately adapt” to an alternative reference rate, there may be a risk to the liquidity and the stability of the markets. The Securities and Exchange Commission has similarly warned that LIBOR’s discontinuation may pose significant risks to the markets. Former Treasury Secretary Steven Mnuchin also suggested that legislation may be necessary to address contracts that reference LIBOR and lack appropriate fallback language. More recently, while testifying before the House Financial Services Committee, both Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have stated that they believe it will be necessary for Congress to pass legislation to allow for a smooth transition away from LIBOR in the U.S.

Alternative Reference Rate Committee

In 2014, in response to recommendations established by the Financial Stability Board and the Financial Stability Oversight Council, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC) in order to address the various risks associated with the LIBOR. However, following the FCA’s 2017 announcement that LIBOR would no longer be published after 2021, the ARRC was reconstituted to facilitate the U.S. transition away from the LIBOR to a risk-free alternative reference rate.

The ARRC’s membership consists of a variety of private-market participants such as large financial institutions and financial industry trade groups, as well as relevant government agencies that serve as ex officio members.16 The ARRC is also supported by a number of working groups that focus on specific issues or industries in connection with the LIBOR transition, including working groups focused accounting and tax, consumer products, business notes, regulatory issues, and securitizations....

Hearing page: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407533

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