Not So Fast, SOFR: Is It a Viable LIBOR Replacement?
Here’s why SOFR could prove deeply problematic for commercial and consumer lending—and alternatives the Fed should consider
LIBOR, the interest-rate benchmark that underpins approximately $200 trillion in financial contracts in the US alone, is set to sunset at the end of 2021, and some financial institutions are raising significant doubts about the initially selected replacement rate.
In June 2017, the Alternative Reference Rate Committee (ARRC), made up of financial- and public-sector officials, with the support of the Federal Reserve, chose the Fed’s Secured Overnight Financing Rate (SOFR) as LIBOR’s replacement.
But some major US banks are sounding an alarm on SOFR’s presumptive coronation. Their objection to using SOFR as a benchmark for commercial and consumer lending is serious and credible—and represents only one of several major issues. The transition to SOFR could have systemic and deeply problematic ramifications for commercial lenders and borrowers. And the rationale for declaring SOFR the new universal reference rate is even shakier considering that other viable options for the loan market are beginning to emerge.