Bill Overview
Title: Adjustable Interest Rate (LIBOR) Act
Description: This bill provides for the transition of certain financial contracts away from the London Interbank Offered Rate (LIBOR), a reference interest rate based upon the lending terms certain banks offer to each other for various lengths of time. LIBOR is set to be retired in 2023. Various financial contracts reference LIBOR as a benchmark for prevailing interest rates and use LIBOR in calculating certain payments or obligations. In the event a contract referencing LIBOR does not have a fallback or replacement rate provision in effect when LIBOR is retired, or a replacement rate is not selected by a determining person as defined by the bill, the bill provides for a transition to a replacement rate selected by the Board of Governors of the Federal Reserve System. The bill also provides for conforming changes to these contracts, the continuity and enforceability of these contracts, and protections against liability as a result of such a transition.
Sponsors: Sen. Tester, Jon [D-MT]
Target Audience
Population: People impacted by the transition from LIBOR to a new reference interest rate
Estimated Size: 80000000
- LIBOR is a global benchmark used in various financial products, such as loans, mortgages, bonds, and derivatives.
- The global financial market is extensive, and it's estimated that hundreds of trillions of dollars in financial contracts are tied to LIBOR.
- Individuals with adjustable-rate loans or mortgages benchmarked to LIBOR could be impacted by changes in interest payments.
- Investors holding LIBOR-tied bonds or derivatives might also feel the impact of the transition to a new reference rate.
Reasoning
- The LIBOR transition policy will primarily affect individuals and institutions involved in financial contracts tied to LIBOR, such as adjustable-rate mortgages, loans, and certain investments.
- Financial institutions and individuals with clear fallback provisions in their contracts are less likely to be heavily impacted.
- Those without such provisions might experience more significant changes in payment terms adjusted to new rates like SOFR (Secured Overnight Financing Rate).
- The impact will differ based on financial literacy, the size of financial exposure to LIBOR-linked products, and how actively they manage their financial contracts.
- Given that the transition plan and selected replacement rates are handled by the Federal Reserve, the policy intends to minimize disruptive financial shocks.
- The U.S. target population for this transition includes about 80 million people as estimated, but the degree of impact varies significantly within this group.
- Budget constraints highlight the need for efficient awareness campaigns and support systems for those most heavily impacted.
- Most direct impacts will be seen in the short to medium term, with potential long-term secondary impacts on financial stability and consumer confidence.
Simulated Interviews
Financial Analyst (New York, NY)
Age: 45 | Gender: female
Wellbeing Before Policy: 7
Duration of Impact: 3.0 years
Commonness: 10/20
Statement of Opinion:
- The transition from LIBOR is a necessary step and provides greater stability for future financial markets.
- Personally, it's a bit concerning, as my mortgage payments could fluctuate unpredictably before a new rate stabilizes.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 5 |
| Year 2 | 7 | 6 |
| Year 3 | 7 | 6 |
| Year 5 | 7 | 6 |
| Year 10 | 7 | 7 |
| Year 20 | 8 | 8 |
Software Engineer (San Francisco, CA)
Age: 32 | Gender: male
Wellbeing Before Policy: 6
Duration of Impact: 1.0 years
Commonness: 15/20
Statement of Opinion:
- I'm not really sure how the LIBOR change will affect my student loans.
- I hope there's enough communication to help understand any changes in repayment amounts.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 5 |
| Year 2 | 6 | 5 |
| Year 3 | 6 | 5 |
| Year 5 | 6 | 5 |
| Year 10 | 6 | 6 |
| Year 20 | 7 | 6 |
Small Business Owner (Dallas, TX)
Age: 51 | Gender: male
Wellbeing Before Policy: 5
Duration of Impact: 5.0 years
Commonness: 8/20
Statement of Opinion:
- The transition away from LIBOR is a bit confusing for small business owners like myself.
- I'm concerned about how changes might affect my business loan payments. More certainty and clarity would be helpful.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 5 | 4 |
| Year 2 | 6 | 4 |
| Year 3 | 6 | 5 |
| Year 5 | 6 | 5 |
| Year 10 | 6 | 6 |
| Year 20 | 7 | 7 |
Retired (Seattle, WA)
Age: 60 | Gender: female
Wellbeing Before Policy: 8
Duration of Impact: 1.0 years
Commonness: 5/20
Statement of Opinion:
- I'm watching how this transition is handled to ensure my investments remain stable.
- Overall, the shift from LIBOR was expected and I've prepared accordingly.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 8 | 8 |
| Year 2 | 8 | 8 |
| Year 3 | 8 | 8 |
| Year 5 | 8 | 7 |
| Year 10 | 8 | 7 |
| Year 20 | 8 | 7 |
Graduate Student (Chicago, IL)
Age: 29 | Gender: other
Wellbeing Before Policy: 6
Duration of Impact: 1.0 years
Commonness: 12/20
Statement of Opinion:
- I'm concerned but hopeful that student loan changes due to the LIBOR transition will be minimal.
- I'm trying to keep informed to manage my finances effectively as I finish school.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 5 |
| Year 2 | 6 | 5 |
| Year 3 | 6 | 5 |
| Year 5 | 7 | 5 |
| Year 10 | 7 | 6 |
| Year 20 | 7 | 6 |
Real Estate Developer (Miami, FL)
Age: 40 | Gender: male
Wellbeing Before Policy: 7
Duration of Impact: 10.0 years
Commonness: 6/20
Statement of Opinion:
- Transitioning from LIBOR is a significant shift in the financial industry.
- As a developer, the stability of rates directly affects my project's profitability.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 5 |
| Year 2 | 7 | 5 |
| Year 3 | 7 | 6 |
| Year 5 | 8 | 6 |
| Year 10 | 8 | 7 |
| Year 20 | 9 | 8 |
Teacher (Boston, MA)
Age: 35 | Gender: female
Wellbeing Before Policy: 5
Duration of Impact: 3.0 years
Commonness: 7/20
Statement of Opinion:
- I'm worried about how this transition affects my mortgage.
- I hope my lender provides clear updates and support.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 5 | 4 |
| Year 2 | 6 | 4 |
| Year 3 | 6 | 4 |
| Year 5 | 6 | 5 |
| Year 10 | 6 | 5 |
| Year 20 | 7 | 6 |
Freelancer (Phoenix, AZ)
Age: 27 | Gender: male
Wellbeing Before Policy: 4
Duration of Impact: 2.0 years
Commonness: 9/20
Statement of Opinion:
- I wasn't even aware of LIBOR until hearing about this transition.
- Worried how my personal loan will be impacted and my ability to repay on fluctuating terms. A clear plan from lenders is necessary.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 5 | 4 |
| Year 2 | 5 | 4 |
| Year 3 | 5 | 4 |
| Year 5 | 5 | 4 |
| Year 10 | 5 | 5 |
| Year 20 | 6 | 5 |
Investment Advisor (Denver, CO)
Age: 61 | Gender: female
Wellbeing Before Policy: 8
Duration of Impact: 1.0 years
Commonness: 4/20
Statement of Opinion:
- The industry has anticipated the LIBOR cessation for years; transitions should be manageable with proper planning.
- I'm advising clients to monitor and adjust portfolios efficiently to minimize disturbances.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 8 | 8 |
| Year 2 | 8 | 8 |
| Year 3 | 8 | 8 |
| Year 5 | 8 | 8 |
| Year 10 | 8 | 8 |
| Year 20 | 8 | 8 |
Industrial Worker (Houston, TX)
Age: 48 | Gender: male
Wellbeing Before Policy: 7
Duration of Impact: 0.0 years
Commonness: 3/20
Statement of Opinion:
- I don't believe the LIBOR rate changes will directly impact me as I don’t manage such contracts.
- I rely on my employers to understand and deal with rate changes in our business dealings.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 7 |
| Year 2 | 7 | 7 |
| Year 3 | 7 | 7 |
| Year 5 | 7 | 7 |
| Year 10 | 7 | 7 |
| Year 20 | 7 | 7 |
Cost Estimates
Year 1: $50000000 (Low: $30000000, High: $80000000)
Year 2: $20000000 (Low: $15000000, High: $30000000)
Year 3: $10000000 (Low: $5000000, High: $20000000)
Year 5: $5000000 (Low: $2000000, High: $10000000)
Year 10: $1000000 (Low: $500000, High: $2000000)
Year 100: $0 (Low: $0, High: $0)
Key Considerations
- Ensuring smooth transition processes to avoid contractual disputes and financial disruptions.
- Monitoring the impact on interest rate fluctuations and borrower costs.
- Identifying fallback language gaps in contracts to ensure all affected contracts are addressed.
- Assessment of long-term impacts on the stability of financial markets.