Nov 10, 2020
The Alternative Reference Rates Committee (ARRC) has selected
Secured Overnight Financing Rate (SOFR) as the replacement for
LIBOR in the US. However, a group of US banks — primarily non-money
centers have expressed concerns about the use of SOFR as the
replacement benchmark for LIBOR. They argue that during times of
economic stress, SOFR would decrease as their cost of funds
increase, eroding the return on SOFR-linked loans. These banks have
championed a more credit sensitive approach or a credit sensitive
supplement to SOFR. In response, the New York Fed created a Credit
Sensitivity Group and have convened four meetings of the group to
date in 2020 to (i) understand of the challenges that banks of all
sizes, and their borrowers, may face in transitioning loan products
from LIBOR to SOFR and (ii) explore methodologies that consider a
credit sensitive rate/spread that could be added to SOFR. Join
Mayer Brown Partner Paul Forrester and Heidi Rudolph, Managing
Director at Morae Global, as we discuss topics including: Why is
there a need for credit sensitive rate? What are the “credit
sensitive” alternatives to SOFR? How can banks use modelling
techniques to identify, quantify and mitigate credit (?) exposures
(and preserve their profit margins?) across their portfolios? How
can banks ensure that these modelling techniques are transparent so
that borrowers can anticipate and manage their borrowing
cost?