Top US Regulators Cast Doubt on Non-SOFR LIBOR Alternatives
At a recent Financial Stability Oversight Council meeting, top US financial regulators strongly endorsed SOFR while warning that banks choosing other rates must justify their appropriateness and understand their underlying weaknesses.
Senior U.S. financial regulators have issued a coordinated warning against adopting certain credit-sensitive alternatives to LIBOR, strongly reinforcing their preference for the Secured Overnight Financing Rate (SOFR). During a Financial Stability Oversight Council meeting, Treasury Secretary Janet Yellen, Fed Vice Chair Randal Quarles, and others cautioned that some proposed replacement rates may replicate the weaknesses that doomed LIBOR, particularly where the volume of derivatives could dwarf the underlying transactions.
The guidance creates significant risk for financial institutions considering non-SOFR benchmarks like the Bloomberg Short-Term Bank Yield Index (BSBY). Acting Comptroller of the Currency Michael Hsu stated that every bank must be prepared to demonstrate to examiners that its chosen replacement rate is appropriate for its products and risk profile. This signals heightened supervisory scrutiny for banks that diverge from the officially endorsed path. Lenders and borrowers who select alternative rates must now be prepared to rigorously defend that choice and understand the potential "fragilities" of the underlying markets, according to the Fed. The collective statements cast doubt on the long-term viability and regulatory acceptance of non-SOFR rates for widespread use.