NatWest Urges Customers To Dump Libor In Virus Squeeze

By Lucia Osborne-Crowley
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Law360, London (October 7, 2020, 2:16 PM BST) -- NatWest said on Wednesday that it will urge corporate customers to move away from the embattled Libor benchmark lending rate before it gets phased out at the end of 2021 as the COVID-19 pandemic slows the rate at which they are moving to alternative rates.

NatWest Group PLC said it is writing to 3,500 businesses from Thursday to urge them to switch away from products tied to the London Interbank Offered Rate. The benchmark is being dropped in 2021 after allegations of market manipulation caused a global scandal.

The bank, formerly The Royal Bank of Scotland Group, is warning companies to choose the new benchmark they wish to switch to before Libor is phased out, to help them avoid volatility in their borrowing costs. The pandemic has slowed the rate at which customers are switching, NatWest said.

Libor became a household name after it emerged that it had been manipulated in the late 2000s, and some of the world's biggest banks were fined billions of dollars. Some traders were handed prison sentences.

Libor was originally due to be replaced by the Sterling Overnight Index Average interest rate benchmark, or Sonia. Banks were told to stop pricing new products against the benchmark by the end of September. But the Financial Conduct Authority said in April it would give lenders an extra six months to accommodate the disruption caused by COVID-19.

The regulator said it recognized that that it is not feasible to complete the transition from the benchmark in all new sterling-denominated loans by the original September deadline.

"There will likely be continued use of Libor-referencing loan products" into the fourth quarter of this year to "maintain the smooth flow of credit to the real economy," the FCA said.

All new issuance of sterling loan products that refer to Libor and which expire after the end of 2021 should cease by the end of the first quarter of 2021, the regulator said.

The FCA has set out a timetable that banks and insurers should follow as they move away from referring to Libor in their financial products. The watchdog wants to avoid adding to a pile of so-called legacy contracts based on Libor that expire beyond the end of 2021.

The City regulator has made it clear that it will not force banks to submit for the reference rate, which is used as a benchmark for around $400 trillion of financial products globally, after the 2021 deadline.

The banking sector has been hit hard by the COVID-19 crisis. NatWest said in July that it had put aside £2.9 billion ($3.7 billion) to cover possible pandemic-linked loan defaults in the first six months of the year. The provision could swell to £4.5 billion by the end of 2020, it warned.

NatWest said in its half-year results that it set aside a £2.9 billion impairment charge to earnings, a sharp rise from the £323 million figure for the same time last year, leaving the group with a net loss of £705 million for the six-month period.

--Additional reporting by Joanne Faulkner and Irene Madongo. Editing by Ed Harris.

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