Farewell Libor? House spending bill offers patch for $16 trillion debt backlog mired in rate


Lawmakers want to give Wall Street and consumers a cure for a roughly $16 trillion hangover, while averting a possible government shutdown this weekend.

A sweeping $1.5 trillion spending package passed the House late Wednesday to continue funding the government through the fiscal year, with $13.6 billion earmarked for aid to Ukraine .

The bill also includes a way for Wall Street and consumers to avoid a potential mess a year from now, when the final steps to stop using the London U.S. Dollar Interbank Offered Rate, or Libor, handover on June 30, 2023.

“It matters to millions of people with variable rate loans, which include mortgages, consumer loans and student loans,” said Michael Bright, chief executive of the Structured Finance Association, a trade group of the sector which groups loans into bond transactions. .

Bright said the bill would smooth out a potentially “confusing and disruptive” period next year, when some $16 trillion in older Libor-backed contracts, such as 15- to 30-year contracts adjustable rate mortgagesmust switch to a new reference rate.

Without the patch, “different borrowers could end up with different rates,” he said by phone Thursday. “This is going to ensure that everyone is migrating at the same pace, at the same time.”

Read: The impending year 2000 you’ve probably never heard of: A new interest rate used to price everything from mortgages to car loans

Libor, used for decades to price everything from big business loans to consumer lines of credit, has proven to be a formidable force in extricating itself from the global financial system, even after the rigging scandal. Libor rates discovered in the wake of the 2008 global crisis. The financial crisis engulfed the major banks and cast a pall over the rate as a benchmark.

Major banking regulators have spent years sounding the alarm for Wall Street to abandon its habit of Libor, first by urging banks to stop using it on new debt contracts from December 31, 2021, without “fallback” language which clearly indicates what rate will be used once Libor is expected to be phased out completely next year.

“We believe this is a vital step for old contracts that cannot be easily changed and which pose a significant risk to the markets if this does not materialize, said Marcus Burnett, chief executive of SOFR Academy Inc., an education and data service that helps investment banks through the Libor transition.

While several states have passed laws to provide their residents and businesses with fixes as Libor ends, Burnett said federal legislation would go a long way to providing a broader framework to address the issues.

“There is a huge amount of attention on this, given the huge number of contracts it is impacting. We look forward to the bill being signed into law by President Biden soon, he said by phone.

The next step is for the Senate to approve the bill, which would also end the threat of a government shutdown on Saturday morning by funding the government until September 30.

The Federal Reserve is also expected to complete its rule-making process.

“It’s the final step from pencil to paper,” Bright said.

To verify: Wall Street takes new steps to kick habit of $200 trillion Libor debt


Comments are closed.