14 October 2021
- EU banks reported significant derivatives and loan exposures linked to various LIBOR currencies and tenors as well as EONIA rates that will cease at the end of the year.
- Transition of important benchmark rates bear high transition risks for LIBOR referencing loans as well as derivatives.
- Banks need to consider legal challenges accompanying the transition of existing exposures as well manage the changes in their internal operations and systems.
- Acknowledging and addressing the underlying risks should be a key priority for market participants.
The European Banking Authority (EBA) today published a thematic note on the transition risks of benchmark rates as LIBOR (the London Interbank Offered Rate) and EONIA (the Euro Overnight Index Average) - two major benchmark interest rates - are close to being phased out.
A very high percentage (more than 25%) of EU/EEA banks’ derivatives exposures is linked to LIBOR, reaching nearly EUR 50 trillion (notional amount). In addition, around EUR 1 trillion of loans and advances are linked to various tenors of LIBOR and EUR 0.2 trillion to EONIA rates. CHF LIBOR referenced loans are a particular focal point in this analysis as political risks add to the, anyhow, existing legal transition risks for these loans.
Transition of important benchmark rates bear elevated risks. These rates play a major role in banks’ daily business, including in valuation and risk management. The EBA thematic note identifies pockets of transition risks for EU/EEA banks due to their significant exposures linked to LIBOR and EONIA rates. Surveys among banks and competent authorities reveal that legal challenges accompanying the transition of existing business of the asset side, as well as required changes in bank internal operations and systems remain key areas of concern.
It is key that benchmark rates transitions are managed diligently and timely within the remaining months. It remains of paramount importance that all parties involved in the transition process cooperate, including banks, their clients, and other counterparties as well as regulators and supervisors. Finally, addressing potential legal or conduct-related risks related to the transitions remains important for banks.