LIBOR Transition

Fulton Bank will no longer offer new loans utilizing LIBOR (London Interbank Offered Rate). Prime and SOFR (Secured Overnight Financing Rate) will be the primary replacements as the benchmark for determining interest rates. Banks around the world are also preparing for this transition, as the most common one-month LIBOR rate publication will be phased out by June 2023. Read more about the decisions that ARRC has made regarding LIBOR as of October 2021. 

What is Libor

LIBOR has been used globally as a benchmark to gauge funding costs and investment returns for financial contracts for more than three decades. It is used to help set the interest rates on many products including loans, swaps, bonds, credit cards, adjustable-rate mortgages, and other products offered by financial institutions.

Why LIBOR is being phased out

Changing industry norms and LIBOR manipulation scandals have driven a shift away from LIBOR, causing interbank lending markets to become much thinner and the number of actual transactions upon which the rate is based to decrease significantly. That has caused regulators worldwide to advocate markets moving away from LIBOR to a more reliable index.

Frequently Asked Questions

What are the alternative rates to LIBOR? 

The Alternative Reference Rates Committee (ARRC), an industry group convened by the Federal Reserve Board and the New York Fed, recommends using the Secured Overnight Financing Rate (SOFR). SOFR is considered a more robust reference rate than LIBOR as it is wholly based on actual transactions and represents an active daily market.

In July 2021, the ARRC announced that it endorses CME's Term SOFR Rates, following the completion of a key change in interdealer trading conventions under the SOFR First initiative. The ARRC’s acceptance of Term SOFR Rates is a major milestone in the transition away from U.S. dollar (USD) LIBOR, providing market participants with an essential transition tool. For more information, read here. 

What is SOFR? 

SOFR is based on transactions in the U.S. Treasury repurchase, or repo, market, where banks and investors borrow or lend Treasuries overnight.

• It is produced by the New York Fed in cooperation with the Office of Financial Research each business day.
• SOFR is continuing to develop and will have multiple variations. Term SOFR, Daily Simple SOFR, SOFR in Advance and SOFR compounded in arrears are currently published.
• The ARRC released A User’s Guide to SOFR  to further explain details about SOFR and how market participants can use it in cash products.

How is SOFR different from LIBOR? 

Although LIBOR and SOFR reflect short-term borrowing costs, they are calculated very differently:

• LIBOR is an unsecured rate, has multiple tenors, has a credit risk component, is set by panel banks, and may be derived using estimated rates.
• SOFR is a secured rate, is a daily rate (overnight), is considered risk free, and is based entirely on actual transaction data from the repo market.
• SOFR is foundationally different than LIBOR, resulting in the need for a spread adjustment. Bloomberg began publishing an indicative spread adjustment (based on the 5-year median spot difference between USD LIBOR and SOFR) in July 2020.

How will the transition away from LIBOR affect my loan?

Fulton Bank will transition customer loans that mature after June 30, 2023, to an alternative index - likely either SOFR or Prime. Fulton Bank will follow financial industry guidance issued by the (ARRC) and will use the five-year historical median spread adjustment methodology for the index conversion.  

What do I need to do to prepare for the transition from LIBOR?

Your Fulton Bank Relationship Manager will provide further updates in advance of any necessary changes. Reference this site for additional resources on the LIBOR transition and industry developments. 

Resources

• ARRC: 
  • Summary of ARRC's Fallback Recommendations (PDF)
  • Alternative Reference Rates Committee
• Bloomberg: IBOR fallbacks and spread fixing for LIBOR (PDF)
• ISDA:
  • Benchmark Reform and Transition from LIBOR
  • Statement on UK FCA LIBOR announcement
  • UK FCA Announcement on LIBOR benchmarks
• FCA:
  • Future cessation and loss representativeness of LIBOR benchmarks (PDF)
  • Announcements on the end of LIBOR