Sh695b of bank funds at risk as global benchmark rate ends

Banks have also been reviewing and upgrading their systems to support a smooth transition to ARR. [iStockphoto]

Banks’ funds totalling Sh695 billion are at risk following the end of an international benchmark interest rate, the Central Bank of Kenya (CBK) has said in a new report.

In the 2021 Banking Supervision Report, the regulator noted that 27 local banks were offering various products of different tenors priced on the London Interbank Offered Rate (Libor), part of which was discontinued in December last year.

The products were valued at Sh695.3 billion, with a big chunk of them being loans. Libor is a benchmark interest rate at which major global banks lend to one another in the international inter-bank market for short-term loans.

“There were various risks associated with the cessation of the Libor. The banks acknowledged that cessation would pose legal, operational, reputational and counterparty risks,” said CBK in the report.

The Financial Conduct Authority (FCA), which regulates Libor, announced in 2017 that it would no longer compel the panel of banks to continue submitting quotes for Libor after December 2021 following attempts to manipulate key global benchmark rates.

Three months later, the FCA advised that all Libor settings will cease to be provided by an administrator immediately after December 31, 2021 in the case of all sterling pound, euro, Swiss franc and Japanese yen settings, and the one-week and two-month US dollar settings. In the case of the remaining US dollar settings, those ones would cease immediately after June 30, 2023.

These developments have left local banks scratching their heads, with a lot of them unsure of what to do with the various libor-based products they have. A survey done by CBK showed that loan products were valued at Sh450.5 billion, representing 14.2 per cent of the total banking sector loans.

There were also the Tier II capital instruments valued at 88.8 billion, representing 12.8 per cent of total products priced on Libor.

Exposure to other banks was Sh75.2 billion, representing 22.4 per cent of total banking sector placements with other banks, deposits, Sh60.7 billion and off-balance sheet commitment at Sh20.1 billion.

To mitigate these risks and facilitate a smooth transition to Alternative Reference Rates (ARR), CBK noted that banks are undertaking various initiatives, including reviewing legal loan contracts.

The lenders are also engaging with the affected customers to inform them of the changes and possible ARR. Staff, including front office staff, are being trained on the expected change and to empower them to engage and respond appropriately to customer queries regarding the transition.

Banks have also been reviewing and upgrading their systems to support a smooth transition to ARR.

Kenya has also borrowed a lot of loans, which have been priced on the Libor. This includes some of the Standard Gauge Railway loans.

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