PH banks asked to switch from LIBOR rate reference

Bangko Sentral ng Pilipinas Governor Benjamin Diokno on Thursday asked banks to proactively transition their transactions to alternative reference rates ahead of the termination of the London Inter-Bank Offered Rate, or LIBOR, as a benchmark rate.

Diokno said in an online briefing that LIBOR, an interest rate benchmark used in a wide range of financial transactions, would enter a phased process of cessation beginning Jan. 1, 2022.

“As the discontinuation of LIBOR as reference rate approaches, the BSP will continue to engage the industry and individual banks to facilitate a smooth transition,” he said.

He said the transition away from LIBOR, initially announced in 2017, reached a crucial stage with the March 2021 announcement by the United Kingdom’s Financial Conduct Authority of the formal timeline for the discontinuation of the benchmark.

Diokno said without the implementation of an orderly transition plan, the ending of LIBOR could give rise to significant operational risks for banks.

The BSP issued Memorandum No. M-2020-083 dated Nov. 17, 2020 on the transition from the LIBOR and reporting requirements on LIBOR-related exposures.

The memorandum highlights the BSP’s expectation for supervised entities to implement viable transition plans to ensure that the expected end of LIBOR would not disrupt their operations and the efficient provision of services to clients and other market counterparties.

“Banks must ensure overall operational readiness for the adoption of alternative reference rates by putting necessary systems and infrastructure in place, and establishing appropriate contractual arrangements,” Diokno said.

The BSP also required all universal and commercial banks and their subsidiary banks to submit quarterly reports on their LIBOR-related exposures.

Diokno said the reporting requirement was intended to facilitate the identification of transactions referenced to the benchmark. The report will also help the BSP in monitoring banks’ progress in actively winding down their LIBOR exposures.

Meanwhile, Diokno said the BSP received a 700,000-euro (equivalent to around P41 million) grant from the Agence Française de Développement to further strengthen its capacity to foster financial inclusion in the country.

“The grant from the French Development Agency is expected to enhance the BSP’s initiatives to empower marginalized sectors in the Philippines by providing them access to financial products and services,” he said.

The grant will fund a technical assistance program to support the BSP’s efforts to leverage on technology for the effective regulation of digital finance, promote digital financial literacy of rural and women-owned businesses, and contribute to public policy dialogue on agricultural insurance.

He said the grant supports the National Strategy for Financial Inclusion. Based on the indicative timeline, the project will kick off in the fourth quarter of 2021 and will wrap up in 2026.

The grant also complements the Inclusive Finance Development Program, which AFD has been supporting with the Asian Development Bank through a 100-million euro sovereign policy-based loan to the Philippines.

The IFDP funds initiatives of the Philippine government to expand financial services across the country, especially among small entrepreneurs, farmers and fisherfolk, women and other vulnerable sectors.