Deadline to end use of Libor in doubt as banks stall on software changes

LONDON (Reuters) - Many banks in Britain are unlikely to hit an October deadline to stop writing loans tied to the discredited Libor benchmark as they grapple with upgrading to crucial new software that allows them to use replacement reference rates, industry sources said.

FILE PHOTO: A man walks past the city of London financial district as dawn breaks in London, Britain August 20, 2019. REUTERS/Hannah McKay

It is another sign of how practical considerations are undermining regulators’ desire for banks to move away from using the London Interbank Offered Rate, which is embedded in some $350 trillion of financial products worldwide.

Once dubbed the world’s most important number, Libor was discredited after the 2008 financial crisis when authorities in the United States and Britain found traders had manipulated it to make a profit.

While the October target is an industry-consensus goal rather than a regulatory edict, the Financial Conduct Authority (FCA) told Reuters it would take a dim view of lenders and borrowers ignoring the deadline.

But the two rival firms that supply loan management software to the industry said not all banks will be ready, while only a handful of loans linked to alternative rates like Sonia (Sterling Overnight Index Average) have been issued so far.

Fintech firm Finastra, which provides loan pricing and valuation software to more than 80 of the world’s biggest financial firms, launched an update to its LoanIQ software on Nov. 29 to incorporate Sonia-linked loan capabilities.

Only around 15 of Finastra’s 60 major financial clients likely to need the update have so far made the switch, Robert Downs, senior principal product manager at Finastra, told Reuters. He said an institution would usually need 6-18 months to upgrade and test the software given the number of internal systems a bank would have to plug into it.

“It’s been convenient for banks to say they can’t progress because systems aren’t ready yet ... the Catch 22 was that the [software] vendors couldn’t get ready until the industry decided how it was going to move forward,” Downs said.

Gregg Cerniglia, who leads Finastra rival FIS’s competing loan platform ACBS, said most but not all of its clients will be ready by the third-quarter deadline.

Both executives said small lenders in particular have been slower to upgrade their systems.

Edwin Schooling Latter, director of markets and wholesale policy at the FCA said banks would need to clearly demonstrate how they plan to quickly upgrade their systems if they miss the deadline.

“Firms who don’t have plans to end their dependency on Libor lending after that date will face a lot of questions from us as to how they are managing the risks,” he said.

Industry sources said reasons for delays included strained resources at smaller banks already overwhelmed by major projects such as Brexit, and the preference of many borrowers to stick with the Libor rate.

Lenders are also wary that clients will be reluctant to use the new rates - which calculate interest by compounding the daily rate over the period of time matching the loan’s duration - as it will not be clear in advance what it will cost them.

“It’s a massive undertaking. No systems are up to scratch yet,” one senior banker said.

Reporting by Sinead Cruise and Lawrence White; Editing by Kirsten Donovan