Market Extra: Goodbye Libor? House spending bill offers a patch for $16 trillion debt backlog mired by the rate
Lawmakers want to give Wall Street and consumers a cure for a roughly $16 trillion debt hangover, while averting a potential government shutdown this weekend.
A sweeping $1.5 trillion spending package was passed late Wednesday by the House to keep funding the government through the fiscal year, with $13.6 billion slated as Ukraine aid.
The bill also includes a way for Wall Street and consumers to avoid a potential mess in a year, when the final steps to quit using the U.S. dollar London interbank offered rate, or Libor, take hold on June 30, 2023.
“This is important for millions of people with floating-rate loans, which includes mortgages, consumer loans and student loans,” said Michael Bright, chief executive officer of the Structured Finance Association, a trade group for the industry that packages loans into bond deals.
Bright said the bill will smooth over a potentially “confusing and disruptive” period next year when some $16 trillion worth of older contracts underpinned by Libor, such as 15- to 30-year adjustable rate mortgages, must transition to a new benchmark rate.
Without the patch, “different borrowers could end up with different rates,” he said by phone Thursday. “This is going to make sure everyone migrates to the same rate, at the same time.”
Read: The impending Y2K you probably never heard of: a new interest rate used to price everything from mortgages to car loans
Libor, used for decades to price everything from loans to major corporations to consumer lines of credit, has proved to be a formidable force to extricate from the global financial system, even after the Libor rate-rigging scandal uncovered in the wake of the 2008 global financial crisis engulfed major banks and cast a pall over the rate as a benchmark.
Top banking regulators have spent years sounding alarms for Wall Street to kick its Libor habit, first by urging banks to stop using it on new debt contracts as of Dec. 31, 2021, without “fallback” language that clearly states which rate will be used once Libor is expected to be fully discontinued next year.
“We think this is a vital step for legacy contracts that can’t be easily amended, and that pose a significant risk for markets if this didn’t go through,” said Marcus Burnett, chief executive officer of the SOFR Academy Inc., an educational and data service that’s been helping investment banks work through the Libor transition.
While several states have passed legislation to provide their residents and businesses with fixes as Libor ends, Burnett said federal legislation would go a long way to provide a more sweeping framework to address problems.
“There is a huge amount of focus on this, given the sheer amount of contracts it impacts. We look forward to the bill being signed into law by President Biden soon,” he said, by phone.
The next step is for the Senate to approve the bill, which would also end the threat of a government shutdown on Saturday morning by funding the government through Sept. 30.
The Federal Reserve also would need to complete its rule-making process.
“That’s the final pencil-to-paper step,” Bright said.
Check out: Wall Street takes fresh steps to kick $200 trillion Libor debt habit