Asia-Pacific banks ready for life after Libor; Singapore leads the pack: report

ASIA-Pacific banks are largely on track for a smooth transition away from the London Interbank Offered Rate (Libor), with Singapore leading the way in adopting alternative reference rates (ARRs), according to a report published by S&P Global Ratings.

The report, Asia Pacific Banks Ready For Life After Libor, stated that Asia-Pacific jurisdictions are split on whether to take a regulator-led or industry-led approach to benchmark rate transition.

Jurisdictions such as Singapore, Hong Kong, Japan and Australia have taken a regulator-led approach while China, India and Taiwan have taken an industry-led approach.

"In our view, a regulator-led approach benefits from a more robust regulatory and supervisory framework as well as clear timelines. An industry-led approach may help smaller institutions with fewer resources to keep pace with the transitioning timeframe."

"Markets and banks must be prepared for the end of Libor. For the unprepared, a disorderly transition could have negative ratings implications. Disorderly transitions, for example, could affect our assessment of institutional framework settings for banking systems, issuer credit ratings on banks, or issue ratings on Libor-linked instruments," said S&P Global Ratings credit analyst Nico DeLange.

"The banking sectors and markets in Asia-Pacific vary greatly in size and complexity. This diversity carries through to Libor transition; no single Libor transition story applies to all banking jurisdictions in this region. Each country has taken a slightly different approach to transitioning and the implementation of country-specific ARRs. The level of preparedness also varies across jurisdictions," he said.

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Meanwhile, several Asia-Pacific jurisdictions have opted for a multirate approach to benchmark rate transitioning.

They have kept an existing benchmark rate in addition to their new ARR. The existing benchmarks that have survived have generally already undergone reform to a robust calculation basis, the report noted.

"In our view, a multirate approach lowers transition and systematic risk for benchmark rate implementation. It also provides banks with a choice of the most appropriate benchmark rate for future contracts," stated the report authors.

That said, the adoption of a multirate approach could lower the urgency for banks to shift to an ARR and may therefore result in a slower adoption rate.

Territories that are following an indefinite multirate approach include Australia, Japan and Hong Kong. Countries following a temporary multirate approach include Singapore and Thailand.