Discontinuation of the internal bank interest rates - are you ready?

The discontinuation of the so-called Interbank Offered Rates (IBOR) is approaching fast.

Internal bank interest rates are used as reference rates for variable interest rates that occur in financial instruments such a loans, derivates, bonds etc. These rates have been criticized for a long time for being easy to influence and manipulate as internal bank interest rates are based on reported interest rates that banks use when lending funds to each other, even when there is no underlying transaction.

The EU and other regulatory organizations thus decided on the so-called Benchmark Interest Rate Reform, which aims to replace interbank rates with benchmark rates based on real transactions.

The most common reference rate, Libor (London bank offered rate), which is not only a reference rate for British pounds but also calculated for several other currencies, such as US dollars, euros, etc., will expire on 31 December 2021. This applies to all currencies except for certain Libor interest rates in US dollars were the discontinuation process will not take place until 30 June 2023.

Our comment

The discontinuation of Libor interest rates, and in the future also other interbank interest rates, will have a significant impact and result in changes. One of these changes is that the basis for interest payments in financial instruments with variable interest rates will change. The basis for interest payments often contains several different components of which the reference interest rate (for example a Libor-based reference rate) is one. Given that Libor will be discontinued shortly (and also other reference rates in the future), all reference rates applied in loan agreements, transfer pricing policies, valuation models, etc. need to be replaced with new transaction-based reference rates soon.

However, changing the reference rate requires a more profound analysis as this change involves both tax and different accounting effects that should be taken into account.

We are happy to discuss these changes and the impact on your operations in more detail over a meeting.