Banks have two years to phase out their use of the London interbank offered rate in setting interest rates on loans, but one bank in Birmingham, Ala., is already planning to ditch Libor in favor of a new benchmark.
ServisFirst Bancshares, which has about $9 billion of assets and focuses almost exclusively on business lending, will begin using a new benchmark known as Ameribor on Jan. 1, Chairman and CEO Tom Broughton said this week.
With regulators already starting to pressure banks to come up with a strategy for moving away from Libor, Broughton said he saw little reason to wait, especially when a viable alternative was already available.
“We felt it was just time to peel the Band-Aid off,” Broughton said in an interview.
Libor is an average calculated from overnight loans between banks in five major currencies around the world. It has long been used to set interest rates, but it has come under scrutiny in recent years since lenders were found to be manipulating the market through rate-rigging schemes.
Regulators have moved to phase Libor out in exchange for a benchmark set to a more active market of actual transactions that could resist schemes to influence it.
“The sunset is just around the corner,” Broughton said. “The regulators are bringing it up. They’re saying you need to find a replacement.”
Ameribor is one of Libor’s possible replacements and was developed with the help of Richard Sandor, a former chief economist at the Chicago Board of Trade and now CEO of the American Financial Exchange, or AFX. The benchmark is based on open-market transactions on the AFX, where overnight funding, unsecured borrowing and lending for U.S. banks and corporations take place.
Ameribor is billed by its founders as better option than Libor because it is based on actual transactions within the exchange where about $2 billion in deals per day take place between about 170 members.
During his postgraduate work at Northwestern in the late 1970s, Broughton took a class on the futures market from Sandor at the Kellogg Graduate School of Management at Northwestern University. When AFX was recruiting banks from each state to join its exchange decades later, Broughton recognized his old professor’s name and reminisced about the complications of futures trading.
Ameribor is just one of several benchmarks lenders can use to set rates once Libor is phased out.
Another is the secured overnight financing rate, or SOFR, which has been regarded as a more prominent replacement for Libor. The SOFR benchmark is based on the Treasury repurchase market, where investors give overnight loans to banks, but unlike the deals on the AFX exchange, this funding is secured.
Broughton, though, favors Ameribor because he views it as less volatile than SOFR. In one day of trading at the end of last year, the SOFR rate jumped more than 50 basis points, according to data from the Federal Reserve Bank of New York.
If the Ameribor rate goes through similar unsteadiness, Broughton said, ServisFirst borrowers will be given the option to secure their loan to a prime rate during a given month.
“We think 100% of customers on Libor right now will choose Ameribor” over a prime rate, Broughton said. “Prime would be a fallback if it misbehaves in some fashion.”
