While most banks, insurers and capital markets firms have plans to transition away from the London Interbank Offered Rate (LIBOR) — which regulators are set to phase out at the end of 2021 — less than half (47%) are confident they have the necessary talent and capabilities to complete the transition by then, according to a new report from Accenture (NYSE: ACN).
The average interest rate at which major global banks borrow from one another, LIBOR is linked to around US$400 trillion in financial instruments, including credit swaps, securitizations, student loans and mortgages.
The report, titled “Liboration: A Practical Way to Thrive in Transition Uncertainty” and based on a survey of 127 financial services institutions and 50 corporates globally, notes that 84% of the institutions have LIBOR transition plans in place. However, four in 10 (41%) admit to lacking a unified and consistent approach across business lines; only one in five (20%) consider themselves operationally ready for the transition; and even fewer (18%) describe their LIBOR transition program as “mature” — i.e., with operationalized systems, remediated legal agreements, fully documented product flows, and compliance to regulatory requirements.
The report suggests that firms use the transition to consider opportunities to transform their operating models and infrastructures; identify which products, both existing and new, will need to be updated to incorporate the new rates; and consider their liquidity and capital positions post-transition, based on their strategy and pace of transition.
“Past experience and our data suggest that transformations of this magnitude will be longer, costlier and more complex than anticipated,” said Samantha Regan, global lead for the regulatory remediation & compliance transformation group within Accenture’s Finance & Risk practice. “The findings indicate that few firms have a holistic transition approach across business units or geographies. There’s a plethora of challenges to consider, including their vendors’ product readiness; unvalidated assumptions in product design and transition timing, which could lead to lending or trading book profit and loss uncertainties; and customer confusion about the transition.”
The survey also revealed a lack of detailed planning in spending priorities as well as siloed planning approaches across the business. For instance, nearly a quarter (23%) of respondents plan to allocate funds to product design over the next three years, while only 17% plan to allocate funds to operations and to risk models, areas which are likely to see significant activities during the transition.
Further, the report notes that specific functions within financial services organizations do not appear to be well-prepared for the transition. Only 15% of respondents say that their legal teams are ready to deal with the numerous contract remediation, deal restructuring and repapering activities, and only 14% say they are confident that their risk management teams have a detailed understanding of the transition activities and the impact on risk management. There also appears to be a lack of alignment across geographies, with nearly half (47%) admitting they are not confident that they understand the regulatory expectations across jurisdictions.
While regulators have urged for a prompt transition away from LIBOR, respondents seem to believe that the 2021 deadline might be flexible. For instance, one-quarter (23%) predict that LIBOR will discontinue gradually after 2021, and half (51%) expect regulators to provide relief to their organization given the regulatory uncertainty.
Organizations with “Mature” Transition Plans See Revenue Opportunity
The report notes that most firms surveyed are taking a measured approach to the transition, but firms with “mature” programs might have a strategic advantage. More than nine in 10 (94%) of these firms see the LIBOR transition as a strategic opportunity, and 91% — compared with just 2% of those without mature programs — believe the incremental revenue generated from the transition can offset the cost of remediation over the next three years.
“Financial services firms have a choice: allocating resources and talent just to comply with regulations, or using the transition away from LIBOR to transform their business and create a competitive advantage,” said Venetia Woo, principal director of North American regulatory strategy within Accenture’s Finance and Risk practice. “There’s real revenue and cost reduction opportunities for those willing to take the lead on setting and trading these benchmark rates — using the LIBOR transformation as a backdrop to fix costly, archaic and outdated technology and processes; eliminate product servicing inconsistencies; and stabilize and reinforce their client relationship strategies.”
More information about the report can be found here: www.accenture.com/LIBORsurvey
For the report, Accenture surveyed 127 treasury and operations executives at financial services institutions, including banking, wealth management, asset management, and insurance, in Australia, Japan, Hong Kong, Switzerland, the European Union, the United States, and Canada. The survey also included 50 treasury and operations executives from other corporate industries — including products and services, resources, health and life sciences, and communications, media, and high tech — based in the United States and Canada. The survey was conducted via computer-aided telephone interviews (CATI) between June and July 2019.
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