Sandy Spring Bank is Preparing for a Transparent Transition Away from the LIBOR Interest Rate Index

Sandy Spring Bank is here to help explain why the LIBOR interest rate index will not be available in the future and how we are preparing for this upcoming change. If you have a commercial loan or line of credit, construction loan or an adjustable-rate mortgage tied to the LIBOR index, we want to make any transition to a new interest rate index transparent, fair and easy.

Background: 
LIBOR is the most widely used interest rate benchmark in the world. The US dollar-based LIBOR is used nationally by financial institutions as the index rate for many types of commercial and consumer loans, as well as adjustable rate mortgages. However, concerns about LIBOR’s transparency and vulnerability to manipulation following the financial crisis in 2008 caused regulators to consider alternative reference rate options. As a result, LIBOR, as a benchmark interest rate, will be phased out and will no longer be published after June 2023.

Transition to a new interest rate index for LIBOR-based loans and adjustable-rate mortgages:
Banks, financial institutions and governments across the globe have been working to identify options for replacing LIBOR. The Federal Reserve Bank of New York’s Alternative Reference Rates Committee (ARRC), which is a group of private market participants, was established to help ensure a successful transition from LIBOR to a replacement benchmark. 

If you have a LIBOR-based loan, including an adjustable-rate mortgage, construction loan, commercial loan, or line of credit, extending past June 30, 2023, we’ll work with you to transition to a new benchmark rate. It is anticipated that existing loans that are based on LIBOR will continue to use LIBOR through June 30, 2023. Until then, your interest rate will continue to be based on the LIBOR index. You don’t have to take any action today. We will keep you informed as we move through the transition from LIBOR.  

For more information on LIBOR, please review the list of frequently asked questions:

What is LIBOR? »
Why does LIBOR need to be replaced? »
What is the Alternative Reference Rates Committee (ARRC)? »
Is there a recommended alternative for USD LIBOR? »
What is Sandy Spring Bank doing to move from LIBOR to a new interest rate index? »
When will my existing loan or adjustable-rate mortgage change to the new index? »
What is the ARRC’s view on how the COVID-19 pandemic influences LIBOR’s expiration date? »


What is LIBOR?

LIBOR is the most widely used interest rate benchmark in the world and is commonly used as the index for floating rate/variable rate loans, such as mortgages, commercial funding transactions, student loans, etc. It is a benchmark rate based on the average interest rate a group of lending global banks estimate they would charge each other for short-term loans. Lenders then use that to calculate the rate you pay on your loan. If you have an adjustable-rate mortgage (ARM), LIBOR is likely the index. 


Why does LIBOR need to be replaced?

Though LIBOR is the most widely used interest rate benchmark in the world, LIBOR has a number of shortcomings and has been under intense regulatory scrutiny for a number of years. In addition, it has become increasingly apparent that the reduced volume of underlying market transactions raises questions about the future sustainability of the LIBOR benchmark. For this reason, several years ago, financial regulators decided there needed to be a new alternative benchmark rate and planned a LIBOR phase out after 2021, with LIBOR interest rates no longer being available after June 2023. Hence, financial markets looked to a durable and more robust alternative interest rate benchmark.


What is the Alternative Reference Rates Committee (ARRC)?

The ARRC is comprised of a group of private market participants convened by the Board of Governors of the Federal Reserve to identify an alternative reference rate and ensure a successful transition from LIBOR. The ARRC was charged with finding a rate that was more firmly based on transactions from a robust underlying market and that would comply with certain standards. ARRC members currently include both banks and a number of non-banks. You can learn more about ARRC by visiting their website: https://www.newyorkfed.org/arrc.


Is there a recommended alternative for USD LIBOR?

The ARRC identified the Secured Overnight Financing Rate (SOFR) as its recommended alternative to USD LIBOR. The ARRC made its final choice of SOFR after incorporating feedback from participants and the members of its Advisory Group. SOFR is transaction based and a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. This rate is robust, is not at risk of cessation, and it meets US and international standards. The New York Fed publishes daily SOFR data. Recently Sandy Spring Bank started using SOFR for certain adjustable-rate mortgages, and we will continue to assess SOFR and other industry accepted benchmark interest rates for future transactions.


What is Sandy Spring Bank doing to move from LIBOR to a new interest rate index?

Sandy Spring Bank is working with industry groups and following regulatory guidance to develop a transition plan to a new benchmark interest rate. This transition plan will be designed to be fair and transparent to our clients. Recently we started using SOFR for certain adjustable-rate mortgages and will transition to SOFR for all new adjustable-rate mortgages in early 2021. We are also in the process of reviewing loan agreements for existing LIBOR-based loans to determine the proper course of action if the loan matures after June 2023. All clients who may be impacted from any changes to loan documentation, benchmark rates, resetting process, etc., will be informed well in advance. More information will be communicated as we progress throughout the transition. 


When will my existing loan or adjustable-rate mortgage change to the new index?

It is anticipated that existing loans that are based on the LIBOR index will continue to use LIBOR through June 30, 2023, and then any interest rate resets after that date will utilize a new benchmark interest rate. All clients who have a loan, line of credit or an adjustable-rate mortgage that has a LIBOR index interest rate, will be informed of any changes well in advance. Sandy Spring Bank will ensure that you have complete information during this transition.


What is the ARRC’s view on how the COVID-19 pandemic influences LIBOR’s expiration date?

The ARRC continues to focus on the established timeline for the transition from LIBOR. The ARRC recognizes that near-term, interim steps may be delayed given the current economic environment with the global pandemic, but it remains clear that the financial system should continue to move to transition to a new benchmark interest rate for new loans by December 2021 and for existing loans after June 30, 2023.