On 14 October 2021, the European Banking Authority (EBA) published a thematic note on the transition risks of benchmark rates, as LIBOR (the London International Offered Rate) and EONIA (the Euro Overnight Index Average) are being phased out.
Key points in the thematic note include:
- 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.
Transition of important benchmark rates carry elevated risks. These rates play a major role in the daily business of banks, including valuation and risk management. The EBA identifies transaction risks for EU/EEA banks as a result of their exposures linked to LIBOR and EONIA rates. Surveys completed by banks and competent authorities reveal that changes in the banks’ internal operations and systems remain areas for concern.
It is vital that benchmark rates transitions are managed diligently and timely in the coming months. It remains important that all parties involved in the transition process cooperate, this includes 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.