The consequences of the abolition of LIBOR
Many Swiss mortgage customers are facing a significant change. Since LIBOR mortgages link the interest rates of a form of real estate loan popular in Switzerland to this size, many homeowners will be affected by any changes. And the fact that there will be a big cut is now considered certain. The criticism of the LIBOR, which was the focus of a manipulation scandal a few years ago, was too strong.
By the end of 2021, Libor and Co. are to be converted to alternative reference interest rates. Andrew Bailey, head of the Financial Conduct Authority (FCA), informed the British authority, which has been monitoring these benchmarks since 2013, of this.
However, these interest rates are still used as a benchmark for $350 billion of financial products. In Switzerland, the National Bank uses them to implement its monetary policy. But the banks, on the other hand, hardly use it any more.
According to Andrew Bailey, there were only about 15 transactions for a certain currency and maturity in 2016. However, banks will continue to have an incentive to use it over the next five years until the new system is introduced.
In Switzerland, the SNB will ensure that a replacement for the LIBOR is found "in due course". Firstly, because it serves as a reference interest rate for Libor mortgages. Secondly, because the Swiss National Bank (SNB) uses it to implement its monetary policy. It sets its reference interest rate at a fluctuation margin around the three-month French franc LIBOR. It is working with the financial sector to find an alternative to this system.
The uncertainty surrounding the forthcoming changeover should not prevent borrowers from taking out a LIBOR mortgage. However, it may be advisable from now on to ask the bank before taking out a LIBOR mortgage how the changeover will proceed one day, and to take a close look at the credit agreement as well as the subsequent periodic letters.
Despite the abolition of Libor, there is every reason to believe that customers will continue to be able to expect a similar offer. In October, the responsible National Working Group for Reference Interest Rates in Swiss Francs (NAG) recommended the Saron money market interest rate as a new reference rate. The cantonal banks are also represented in this important expert committee.