The countdown is on: One of the most important interest indexes in the world, LIBOR (London Interbank Offered Rate), is on its way to being retired. Since the index provides the basis for many types of variable rate loans (including commercial, wealth management, mortgage loans, student loans and credit cards, among others), as well as financial assets (such as derivatives and swaps), its discontinuation is quite a big deal.
Let’s take a look at why LIBOR is going away, why it matters and what you can do to ensure you’re prepared:
Why is LIBOR Retiring?
During the 2008 financial crisis, the LIBOR index demonstrated a vulnerability to manipulation. The result was billions of fines for banks—and some traders even went to prison. As a result, regulatory bodies determined that the LIBOR index will end in 2021. That means banks will need to transition to another index.
Who Will Be Affected?
All banks and financial institutions that have used LIBOR as the benchmark to set the interest rate for any individual loans and assets they have sold to date will be directly impacted by the discontinuation of LIBOR. But the ripple effect will likely be felt by commercial enterprises, not-for-profits and governments—not to mention consumers and global economies.
What’s at Stake?
Clearly, financial institutions want to avoid business disruption and litigation after 2021. In the next two years, banks must identify all contracts, loans and assets referencing LIBOR and update the language of the loan contract to reflect the new index (the LIBOR replacement) to set the interest rate for every individual loan, as well as all other financial instruments based on LIBOR. This will inevitably involve re-negotiation and/or re-papering of loans (since many banks are still heavily paper-based operations), which is no small feat in terms of both costs and time. And all affected customers will need to be notified. In some cases, a simple disclosure will suffice; in other cases, negotiation is likely and will potentially involve attorneys.
When you think about the sheer volume of contract and loan changes LIBOR will require, banks are rightly concerned about risk, particularly in the form of litigation brought by customers if the transition to a non-LIBOR benchmark is handled poorly.
What are the Keys to Success When Preparing for the LIBOR Transition?
Since time is of the essence, immature and untested technology will invariably do more harm than good. Third-party patchwork “solutions” will have to be integrated, and unanticipated gaps in functionality are likely to appear and lengthen implementation timelines. And that translates to greater costs—and risk. This is where tried and true intelligent automation technology can relieve some of the pressure, mitigate the risks inherent to the changes LIBOR brings and, ultimately, safeguard customer satisfaction. The LIBOR transition is too critical to delegate to a start-up or a multi-vendor patchwork solution.
The smart approach to the LIBOR transition is to ensure your business leverages a mature, integrated intelligent automation solution. That means a solution that leverages built-in artificial intelligence (AI) designed specifically for automating end-to-end business operations.
So how exactly is intelligent automation the key to helping you successfully navigate the LIBOR transition? AI-enabled intelligent automation empowers your business to:
- Automate the locating, capturing and, most importantly, the understanding of the context and intent of data within documents. Gone is the need to perform manual searches for all the problematic LIBOR language in loans, contracts and assets.
- Streamline defined business processes so that everything doesn’t come to a grinding halt when you hit a bottleneck.
- Delegate time-consuming manual tasks to a software solution, and free your human talent to focus on high-value, customer-focused work.
- Have visibility into your transition progress and what’s working well—and what’s not, so you can take action sooner rather than later. And enjoy peace of mind knowing you have a detailed transition metric for reviews, audits and possible litigation.
- Easily scale on your timeframe, as your unique business needs dictate.
The LIBOR countdown has started, and the time to act is now.
Ensure you are prepared for the LIBOR transition—Watch the recorded webinar “The LIBOR Challenge: Limit Your Exposure and Safeguard Customer Satisfaction.”