The main rates for signing contracts for loans and mortgages
With the start of 2022, the world of finance will take a crucial step towards the phasing out of the Libor, the rate that for 45 years was one of the main references for the signing of contracts for loans and mortgages. In fact, since January 1st, the agency explains Radiocor, the transition to a regime based on a new set of taxi overnight risk-free (Rfr) while the Libor will continue to live, in a minor form, for the 230 trillion dollars of existing contracts who use it as a basis for interest payments.
For regulators and banks, the start of the new era marks a turning point after years of effort and preparation to replace the Libor, whose fate had been sealed since 2012 when the authorities discovered that i traders at major investment banks had found a way to manipulate the fixing of the rate. Investigations followed which led to fines for the banks involved equal to 10 billion dollars and the search for a solution that would allow to deactivate, as decided in 2017 by the British Financial Conduct Authority (FCA) and other authorities, the Libor rates for the five main world currencies, dollar, euro, Swiss franc, sterling and yen.
To avoid taking the risks of the past, it was decided to move from a system such as the Libor which was based on the banks’ estimates of future rate levels, and therefore subjective estimates, to a instead, a system based on loan rates overnight, or on the transactions that took place the day before. This eliminated the bank credit risk component, making them “risk-free”. The new rates therefore reflect concluded agreements not future transactions as was the case with the Libor.
For the authorities, the challenge was not only to develop new benchmarks, but also to develop new legal guarantees and prepare the world of finance for the inevitable transition. However, the United Kingdom and United States authorities have allowed the dollar Libor for existing contracts to remain in force until mid-2023 and the FCA has also allowed “synthetic” versions of Libor in yen and pounds continue for a year. The FCA has not decided whether it will continue with the synthetic versions of the Libor in US dollars after June 2023 and will make a decision towards the end of next year.
#Mortgages #era #Libor #ends #overnight #rate #system