Valley’s Transition from LIBOR to an Alternate Interest Rate Index


What you need to know

Valley National Bank is committed to keeping you informed of any changes, within the banking industry, which may affect your financial relationship.  Currently, the banking industry will be transitioning its use of LIBOR, a widely used interest rate index, to an alternate interest rate index.

How this affects you

The migration from LIBOR to an alternate interest rate is necessary as the underlying transactions, which support LIBOR, are no longer frequently transacted thereby causing LIBOR to be unreliable and subject to manipulation by nefarious parties.  As a result, the Intercontinental Exchange (ICE), which is tasked with overseeing and publishing LIBOR rates, has publicly announced that they can no longer support the accuracy of LIBOR, and they will only support LIBOR, as a “trusted” index for 1-week and 2-month USD LIBOR, through December 31, 2021.  Therefore, ICE and a multitude of governmental agencies have strongly recommended that financial institutions, worldwide, use an alternate interest rate index for all financial transactions charging interest including new loan originations, loan renewals, and SWAP transactions.

Valley will adhere to the revised industry standard and will thereby transition from LIBOR to an alternate interest rate index when making commercial loans and other financial accommodations for its customers. Banks are encouraged by U.S. Regulators to stop entering into new USD LIBOR contracts “as soon as practicable,” and by no later than December 31, 2021.  As a result, Valley will be unable to write any new agreements, such as loans and swaps, using LIBOR as a reference rate after December 31, 2021.  The ICE will provide the rate, used for the LIBOR index, through June 30, 2023, which allows for existing agreements to mature.


We’re here for you

We understand that you may have questions about this change and its impact on your accounts with us; therefore, we have developed a list of “Frequently Asked Questions” (FAQs) which may address your immediate concerns.  If you have further questions or concerns, feel free to contact your Relationship Manager to discuss them.  You may also find information concerning the demise of LIBOR and the financial markets’ transition from Libor to an alternate benchmark interest rate on the websites provided at the end of the FAQs.



Frequently Asked Questions: LIBOR Transition

  • What is LIBOR?

    The London Interbank Offer Rate (LIBOR) is an interest rate benchmark derived from the interest that London-based banks would offer to another bank for short-term unsecured loans, generally, using the Eurodollar (i.e. US Dollars that exist outside the United States). Historically, LIBOR was an average of these transactions set by London-based banks as an interest rate index to other customers. The popularity of using LIBOR as benchmark grew internationally. Currently, transactions worth trillions of dollars use LIBOR as the benchmark interest rate.

  • Why is Valley transitioning from LIBOR to an alternate interest rate margin?

    Valley is transitioning from LIBOR because the underlying interbank transactions, which are the basis of the LIBOR calculation, no longer occur in large numbers. The underpinnings of the rate are now based more on estimates of what the rate would be if such transactions were to occur and not on a multitude of actual transactions. As a result, LIBOR could not be relied upon as accurate, and it can be easily manipulated by nefarious parties. Thus, the ICE International Benchmark Association (referred to as ICE or IBA), the entity tasked to collect the underlying transactions and publish LIBOR, has determined to stop requiring participating banks to provide the underlying transaction data after December 31, 2021.

  • When and why will ICE stop supporting LIBOR?

    The ICE Benchmark Administration will cease publication of 1-week and 2-month USD LIBOR at the end of 2021. The USD LIBOR cessation date is June 30, 2023, however, Banks are encouraged by U.S. Regulators to stop entering into new USD LIBOR contracts “as soon as practicable,” and by no later than December 31, 2021.

  • What is Valley doing in preparation for the impending LIBOR Transition?

    Valley has appointed a LIBOR Transition Task Force, which is a highly focused and specialized cross-disciplinary team, to oversee the transition from LIBOR to alternate interest rate indexes (e.g. SOFR) and will monitor its effect on loan payments, loan products, commercial operations, and systems.

  • Has an alternate interest rate index been identified?

    The New York Federal Reserve Bank (“NY Fed”) along with partners in the private community formed the Alternate Reference Rates Committee (“ARRC”). The ARRC looked at existing interest rates and explored the creation of new benchmarks, which comply with the principles for financial benchmarks as published by the Board of the International Organization of Securities Commissions (“IOSCO”). After studying the issue, ARRC had the NY Fed create a new reference benchmark, Secured Overnight Financing Rate (“SOFR”). The ARRC does not require that SOFR become the only benchmark, but it prefers SOFR as alternate interest rate index to LIBOR for US based financial offerings.

  • When will Valley transition to an Alternate Interest Rate?

    Valley will transition to alternate floating reference rates due to the demise of LIBOR. It may use SOFR as an alternate reference rate once the market conditions for the use of SOFR are clarified, as well as when the systems, which support this transition, have been implemented.  The transition to an alternate reference rate commenced during the fourth quarter of 2020 and will continue throughout 2021.

  • What is SOFR?

    SOFR is a daily rate, which is published by the NY Fed, based on transactions in the US Treasury Repurchase (i.e. repo) market. This market conducts millions of transactions daily and SOFR is the volume-weighted median of these transactions. Repos are a form of short-term borrowing whereby a party sells government securities to an investor and then the party buys them back on a certain date at a higher price. The differential of all included transactions for the prior day is calculated and published the following day. SOFR is based on a large volume of transactions that are transparent and can be audited.

  • How does SOFR differ from LIBOR?

    SOFR and LIBOR are not comparable. LIBOR is based on unsecured transactions, so credit risk factors were built into LIBOR.  Since SOFR is based on secured transactions, credit risk factors are not built into it.
    SOFR is a daily rate that looks backward as an officially published forward curve has not been developed at this time. As a result, rates must be set in arrears for certain transactions, and the actual rate may not be known until the end of the interest period. If SOFR is used for certain transactions, Banks may decide to set the rate based on the published SOFR interest rate at the beginning of the period, based on the last 30+ day average. This is known as setting the interest rate in advance; however, the interest rate will always have a time lag.  Additionally, banks need to determine if they will compound those rates based upon the outstanding principal balance or maintain those rates as is.
    SOFR presents certain issues before it can be used on a regular basis, inclusive of the lack of credit risk factors and the lack of a forward-looking curve.  Valley may use multiple floating reference rates concerning financial transactions it underwrites, not just SOFR.  SOFR is a daily rate so it can fluctuate daily.  The fluctuation flattens if a multiple day average is used to set the rate.  The Federal Reserve Bank of New York started publishing 30, 90, 180-day average, to flatten the fluctuations, in the Spring of 2019.  Additionally, once a forward-looking curve based on SOFR is developed, it will be published daily on the website of the Federal Reserve Bank of New York.
    The Alternate Reference Rates Committee (ARRC) focused on the use of SOFR “in arrears” and recommended structures include: Daily Simple SOFR and Daily Compound SOFR.  Compound interest will have less hedging basis relative to SOFR Overnight Index Swap (OIS), but simple interest is more straightforward and the basis between simple and compounded SOFR is a few basis points.  In either case, the rate for the entire interest period would not be known at the beginning of the interest period; instead, overnight SOFR would be pulled daily and compounded based on the prior day’s rate.  For further information on practical methods used to calculate the daily accrual of interest for Daily Compounded SOFR, click the link below.  Additionally, this link discusses legacy LIBOR loans converting to SOFR.