Benchmark rates, also known as interest rate benchmarks and reference rates, are used in various different types of financial products and contracts and reflect what it costs for banks to borrow from each other. Currently benchmark rates are determined by using expert judgment of a contributing panel of banks and calculated and published daily by an independent industry body. Benchmark rates are used selectively by banks in some but not all products and services. Bank of Ireland tends to use benchmarks such as the London Interbank Offered Rate (“LIBOR”) and Euro Interbank Offered Rate (“EURIBOR”) in business or corporate transactions as well as bank to bank transactions.
Since 2014, financial institutions worldwide have been progressively moving towards establishing new benchmark rates to replace LIBOR and other benchmarks or, in the case of EURIBOR, to change the existing methodology. The move to these replacement rates and change of existing methodology is what is known as Benchmark Reform.
The replacement rates are designed to be Risk Free Benchmark Rates (“RFRs”) and differ from current benchmark rates in that they are to be based on actual transactions with minimal reliance on expert judgment from contributing banks. As a result they will be more transparent and reliable. These new RFRs need to be available and must be used for transactions entered into or maturing after 31 December 2021. After this time it is expected that the commonly used LIBOR rates will no longer be published or supported. EURIBOR is expected to be published and supported after that time, however, its methodology is being changed to reform EURIBOR into a RFR. EURIBOR’s administrator currently expects to complete the reform process by the end of 2019.
The EU Benchmarks Regulation, which came into effect across the EU on 1 January 2018, supports the reform process, introducing a common framework and consistent approach to benchmark regulation across the EU. It requires EU financial institutions to follow a code of conduct to ensure a robust approach to using benchmarks, which includes clear fall-back mechanisms, should the benchmark be unavailable for any reason.
Financial institutions including Bank of Ireland have already begun to prepare for the transition to new benchmarks, so if you have any queries please talk to your Bank of Ireland Relationship Manager or get in touch at Benchmarkinfo@boi.com
The following are some questions and answers that will help you understand Benchmark Reform and how it might impact any products you hold or transact in with Bank of Ireland. We have also included some links to external websites where you can find out more about Benchmark Reform.
Benchmark rates are set by a panel of banks who each submit the rates at which they would offer to lend unsecured interbank money (money being lent from one bank to another) for different periods and for a number of currencies. Using a defined method, an average of the rates submitted by contributors is calculated and the benchmarks such as LIBOR or EURIBOR are made publically available daily by an appointed administrator.
Benchmark rates have been fundamental to interest rate markets for decades and banks can choose to use these in the pricing of their products and services. In Bank of Ireland benchmarks are generally used in business and corporate loans and financial products and the most commonly used benchmarks are LIBOR and EURIBOR.
The financial crises in late 2008/2009 exposed the LIBOR market to liquidity and reliability issues and caused regulatory bodies to scrutinise how benchmarks are set and administered.
Since 2014, financial institutions worldwide have been progressively moving towards establishing new Risk Free Interest Rate benchmarks to replace current benchmarks such as EURIBOR and LIBOR. It has been announced that LIBOR rates will no longer be published or supported past the end of 2021. EURIBOR is in the process of updating its methodology. EURIBOR’s administrator expects the reform process to complete in the coming months.
These new Risk Free Rates (RFRs) differ from current benchmark rates in that they are designed to be based on actual transactions, with minimal reliance on expert judgment from contributing banks. These new rates will replace existing benchmarks for interest rate-linked products, and financial instruments, such as fixed income securities, loans and derivatives. This move to Risk Free Benchmark Rates is commonly known as Benchmark Reform.
Although the final date for reliance on current benchmarks is 31 December 2021, we want to let customers know that reform is underway and how it may impact on your financial requirements and products. Although benchmark reform is not applicable to all of our products or every customer, where it is applicable, we need to start planning for a smooth transition to new rates when required.
If you have existing products with us that are impacted we will be in touch with you well before the end of 2021.
Benchmark rates are most common in banking products used by business or large corporate customers, for example, for some business loans the overall interest rate applicable to the loan would be determined by using a benchmark rate plus the Bank’s lending margin. Commonly used benchmarks in Bank of Ireland are EURIBOR, LIBOR and USD LIBOR rates. As you can see many currencies will be impacted in some way.
It is expected that EURIBOR rates will be reformed into a RFR in the coming months and this should help minimise the impact on Euro products. We will keep you informed as the EURIBOR reform process progresses. However products or loans, maturing beyond 2021 and referencing LIBOR rates are expected to need new replacement RFR’s and we do not expect to know what the replacement rate might be until early 2020.
Some customers who use interest rate swaps or derivatives for risk management purposes will be impacted by this reform for any transaction maturing beyond 2021. Your relationship manager will support you in the transition to replacement rates.
If you have a benchmark product with a maturity before 31 December 2021 there should be no impact.
As mentioned we will know more about replacement rates in early 2020 and if you have an impacted product or service we will be in touch with you.
Interest rates on Bank of Ireland Variable Rate Mortgages provided to personal customers (i.e. customers who are not business banking or corporate banking customers) are set by Bank of Ireland at its discretion and will NOT be impacted by Benchmark reform. The factors that the Bank considers when setting its variable rates are detailed in our Variable Rate Policy Statement which is available on our website at BOI.com/mortgages or from any branch of the Bank.
Bank of Ireland Tracker mortgage loans use the ECB Repo rate which is also NOT impacted by Benchmark Reform.
The industry and financial markets have so far only established new Risk Free Rates in overnight markets. For example, US Dollar and Sterling have new Risk Free Overnight rates, USD Secured Overnight Financing Rate (“SOFR”) and reformed Sterling Overnight Index Average (“SONIA”) and the EURO equivalent is Euro Short Term Rate (“€STR”).
Overnight rates are not generally used in customer products due to the complexity of interest calculation. Normally customer products are priced on TERM benchmarks, e.g. 1 month, 3 month or 6 month rates. The market has not yet established replacement TERM rates and therefore we do not have a like for like alternative yet and cannot start to transition existing products.
It is hoped that there will be more clarity on replacement TERM rates in early 2020 and we will update this information as soon as we know.
There is no need for you to do anything just yet. If we are transacting products or services with you that are impacted, we will let you know and also bring your attention to revised terms and conditions to protect you and your product from possible changes due to Benchmark Reform.
If you have a product maturing after 2021, we want to make you aware that some changes are anticipated and as soon as we have clarity on replacement rates we will be in touch directly with you.
As we await industry development and clarification on replacement rates for customer products our priority is to ensure that we support you and your business through Benchmark Reform. If you would like to know more please get in touch with your relationship manager or send us an email on Benchmarkinfo@boi.com.