libor

The London Inter-bank Offered Rate (LIBOR) is the benchmark interest rate for various financial transactions in several major currencies (including US dollars, Euros, pounds sterling, and Swiss francs), for periods of up to one year. LIBOR is published by the Intercontinental Exchange  . LIBOR is used as the primary benchmark interest rate worldwide for transactions in or linked to a foreign currency at a variable interest rate: loans, deposits, interest rate derivatives, bonds, and more. It was recently decided (on an international level) to discontinue the use of LIBOR for all currencies as of January 1, 2022, as detailed below.

LIBOR is published by the British Bankers’ Association on every business day at 11:00am London time, based on the estimates submitted on that business day by the leading international banks in London. These estimates represent the interest rates at which the banks are willing to lend to one other.

This is a global reform, in which the LIBOR interest rate will cease to be published and will be replaced by other interest rates. The change will affect all financial systems worldwide. The publication of LIBOR interest rates is expected to be discontinued on 31/12/2021, with the exception of the LIBOR interest rate in US dollars, which is expected to be discontinued on 30/06/2023.

In light of the recommendations of international committees, a number of alternative interest rates have been set worldwide. These alternatives to LIBOR are published by the institutions that have been tasked with managing them, and also by other international financial reporting systems, such as Bloomberg and Reuters.

Below are the leading alternatives that are expected to replace LIBOR:

It should be noted that certain alternatives are based on interest rates that reflect a risk-free rate of return, in contrast to LIBOR interest rates, which also take credit risk into account. Accordingly, the transition to alternative benchmark interest rates may involve the addition of a risk-derived margin.

The following example illustrates, in accordance with the data currently available to the Bank of Jerusalem, the impact of replacing the benchmark interest rate for mortgages, which is currently updated every three months based on the LIBOR interest rate in Euros. Until the end of 2021, the interest rate calculated for mortgages is based on the LIBOR (Euro) interest rate for a period of three months. From 2022, this benchmark interest rate will no longer exist, so the Bank will switch to using the 3-month Euribor to calculate its benchmark interest rate (in accordance with the guidelines published by the Bank of Israel). For example, if the formula for determining the interest rate on a loan was previously LIBOR (Euro) for three months plus 2.5% (L + 2.5%), from 2022 the formula will be Euribor + 2.5%.

In the table below, you can see the differences between the expected alternative benchmark interest rates and the current interest rate (as of 31/7/2021):

Note: It must be emphasized that the above table only provides a sample of the benchmark interest rates currently being considered as suitable alternatives by banks in Israel. It is hereby clarified that the table does not reflect the benchmarks that will be set in practice and should not be viewed as any obligation upon the Bank of Jerusalem to use any specific alternative benchmark interest rate. Notification regarding the alternative benchmark interest rate will be sent to the Bank of Jerusalem customers to whom the new benchmark interest rate will be relevant, in accordance with the directives of the Supervisor of Banks.

Further information and elaborations regarding alternative interest rates can be found on the website of the Bank of Israel and the websites of various central banks worldwide, among other places.

The new interest rates will be basic interest rates that will replace the LIBOR interest rate as a benchmark for calculating the interest rate on existing financial products (loans and deposits), as well as for new transactions.

It is clear to us that changing the benchmark interest rate during the life of a financial product creates uncertainty in long-term foreign currency transactions, in which interest rates are set based on variable interest rates.

Therefore, in the case of new long-term foreign currency transactions, customers who wish to avoid uncertainty can consider opting for a fixed interest rate.

In the case of existing transactions, the conversion to an alternative interest rate that will replace the LIBOR interest rate will be carried out in accordance with the customary method accepted internationally. The Bank will notify relevant customers prior to the change.

The change only applies to financial products in a foreign currency with a variable interest rate. As of January 1, 2022, the financial system is expected to stop using the LIBOR interest rate (with the exception of the US dollar currency) and adopt the new interest rates. As stated, the LIBOR interest rate will only remain for the US dollar until 30/6/2023, and is mainly expected to be used up to this date for existing financial transactions.