Financial Markets

Regulatory demands to phase Libor out of the global financial system has been one of the toughest challenges for banks, yet this could present a silver lining for those willing to take the task head-on. By Michael Spellacy, Global Capital Markets Practice Lead, Accenture

Plenty of airtime has been dedicated to the London interbank offered rate (Libor) prophets of doom. Pundits have warned of widespread confusion from the 2021 decommissioning of the benchmark interbank lending rate, which has been described as the world’s most important number. 

On top of this, the Bank of England, the Financial Conduct Authority (FCA), and the Working Group on Sterling Risk-Free Reference Rates recently ramped up pressure on firms to prioritise transition, urging the industry to act now. That this is a ‘critical’ year for Libor transition is by no means an understatement. 

While firms can choose to proceed slowly with their transition efforts, there may be business advantages to moving forward with pace, provided they are ready. Accenture found that less than half (47%) of financial services firms are confident they have the necessary talent and capabilities to complete the transition by 2021. And with firms lagging behind, a step change is drastically needed.

Repairing customer relations 

Being unprepared does not mean that banks should spend this year in Libor limbo. In fact, they should use this massive regulatory transition to repair relations with their most important stakeholders: their customers. 

It is precisely because Libor is such a big deal that firms should not hesitate in seizing this bull by the horns. The rate has been the backbone of the world’s entire lending system for more than 40 years. It is the reference point for up to $350tn in derivatives, bonds, securitised products, loans and mortgages. It is why the punishment meted out to six major banks in 2015 for rigging the rate needed to be more than a rap on the knuckles.  

The transition away from the benchmark will be a proportionally huge manoeuvre that firms need to execute now. Getting rid of Libor, adopting new benchmarks from the alphabet soup of proposed alternatives, such as the US Secured Overnight Financing Rate (SOFR), and then ensuring compliance will be more than just a regulatory headache.

It is not reassuring that so many financial firms seem to underestimate the complexity of the task at hand. The average bank will need to search every system of every division – whether that is retail, corporate, investment, private, transaction or insurance – to find out where Libor lives. It will then need to calculate the size of that exposure, mitigate the risks, prepare for the new environment, and then ensure compliance. There is also the issue of communicating these rate changes and their impact to clients, which will vary greatly by the type of product involved. Banks are woefully behind on this front,

It is a huge, once-in-a generation job that demands more than half-measures. This is why banks should consider killing two birds with one stone. Or to use a motoring analogy, they should do more than just replace the oil while the hood is up: they should think about retuning the engine.

If we look at our average bank, this is likely to be a complex, opaque institution whose IT and data systems across its various corporate divisions work in not-so-splendid isolation from each other. The flow of data through this byzantine set-up is anything but smooth and uninhibited. This inefficiency is visible in the onboarding process for customers, which has approximately 39 steps. Now think about the costs that our average bank incurs for its inefficiency in carrying out the relatively straightforward job of capturing a customer’s information. 

Too many excuses 

Banks have offered thousands of excuses along the years as to why they cannot offer a better customer experience. These excuses no longer wash with consumers, who can become Netflix, Amazon or Google customers in just a few minutes. High onboarding costs are also unjustifiable and unsustainable in this environment of lower loan volumes. 

In this light, the transition away from Libor presents our average bank with a stark choice. They can either allocate just enough resources and talent to ensure short-term regulatory adherence and client retention, or they can see the transition for what it is: a golden opportunity to transform their business, gain a competitive advantage and win back customers’ trust. 

A carpe diem mentality will serve banks better than a makeshift solution. Since banks cannot avoid the transition, they should roll up their sleeves and recast their entire business model with the client in mind. This means initiating platform upgrades and overhauling inefficient legacy systems, processes and operations to enable data to flow freely within the organisation’s system for the benefit of both existing and prospective customers. 

There are real revenue and cost reduction opportunities for banks with the wit to use the Libor transformation as a backdrop to fix costly, archaic and outdated technology and processes, and eliminate product servicing inconsistencies. The nimblest banks will already be developing a portfolio of new rate products that reference new risk-free rates, and fine-tuning their trading, arbitrage and marketing strategies. They will need to move quickly while remaining realistic about what they can achieve over the next few years. If banks do not act now, they stand to face significant reputational and operational risks, not to mention the prospect of customers jumping ship - an issue most banks cannot afford to risk.

In years to come, it should be easy to identify the Libor opportunity-seizers from the passive pack – they might well be the ones with increased customer retention rates, lower costs and higher profits. But the clock is ticking. 

A Speakers’ Corner is an area where open-air public speaking, debate and discussion are allowed. The original and most noted is in the north-east of Hyde Park in London 

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