The deadline for replacing the financial benchmark LIBOR (the London inter-bank offered rate) with new benchmarks is still achievable, but stiff challenges remain, says Fitch Ratings.
In a new report, the rating agency said efforts to scrap the critical benchmark and replace it with new risk-free reference rates have continued to make some progress despite the Covid-19 pandemic.
Fitch said meeting the deadline for dropping LIBOR by the end of 2021 is still possible, but some of the biggest hurdles remain.
For instance, significant transition risk remains, particularly for legacy contracts that aren’t able to adopt new benchmarks.
Additionally, the U.S.-dollar LIBOR market is behind the U.K. market in preparations for the shift to new rates.
“Uneven progress reflects U.S. regulatory fragmentation,” Fitch said.
Due to the lag in U.S. readiness, the banking industry is proving cautious about embracing new rates.
“Smaller and regional U.S. banks still appear reluctant to switch from LIBOR-linked issuance and lending,” Fitch said, noting that the replacement may not be determined until mid-2021.
Further, loans made by the U.S. Federal Reserve Board under certain Covid-19 response programs are still being geared to LIBOR due to demand from the industry, it said.
Whether U.S. legislation regarding legacy issues will materialize also remains to be seen.
If it does, whether it’s “robust enough to resist any potential legal challenges may not be known for some time,” Fitch said.
Policymakers around the world are seeking to replace LIBOR, which was long the dominant benchmark, in the wake of a major market manipulation scandal and failed efforts to reform it.