LIBOR was introduced by the BBA in 1986 and facilitated the massive growth in the offshore US dollar market and LIBOR indexed financial derivatives. To have endured for >30 years this benchmark must have had some very compelling attributes. These include simplicity of concept - the rate at which banks of equivalent (decent) credit rating would lend to each other for specific tenors, principally up to one year and the reliability of the process for setting the rates with a panel of well regarded banks. Unfortunately the trust in the reliability has been eroded by delinquent behaviour and we are now heading to much less simple alternatives.
https://www.ft.com/content/a85089e8-9da7-11e9-9c06-a4640c9feebb
So who are the likely winners and losers …
Losers - Global banks with massive existing (mainly USD denominated) loans and derivatives using the LIBOR benchmark. There are huge transition costs and management distractions in yet another major regulatory project, just as these banks are completing their adjustment to post GFC capital and liquidity regulations. USD borrowing corporate clients face higher costs and potentially greater volatility as the move to the O/N benchmark takes place.
Winners - Large Asian national and regional banks. Expect a much more pragmatic regulatory response in Asia which recognises the merits of maintaining simplicity while strengthening governance to improve reliability and restore trust. Big Tech challenger banks - again in Asia that don’t have the legacy LIBOR exposures and can fully focus on client needs.
Don’t underestimate how the benchmark change will change the competitive landscape.