If you have a dollar loan or at any time tried to obtain one, your lender bank may have mentioned in the bank by the Libor (London InterBank Offered Rate), an interest-rate average calculated from estimates submitted by the leading banks in London.
This index, which is used as a reference for dollar credits in the national financial system – although it is not the only one – will disappear at the end of 2021 after a series of controversies and questions that aroused distrust around its calculation.
In July 2017, the financial regulatory body in the United Kingdom, the Financial Conduct Authority (FCA), announced the end of the rate, an indicator that for decades served to generate reliable information that helped set the price of a wide variety of products ranging from loans to mortgages and other more complex derivatives.
Libor, which is actually a set of indexes, is calculated based on a daily survey in which about 20 banks estimate how much it would cost them to borrow unsecured money among themselves. As the tendency for entities to finance each other without any guarantee was reversed, the index became a more theoretical and less real reference.
Brexit had weight in the decision to end Libor, but the fact that sentenced its future was the discovery made by the United States and United Kingdom authorities, in the midst of the 2008 financial crisis, about manipulations of the indicator by the banks to benefit.
Given this scenario, regulators around the world began to look for options to replace the Libor rate and Costa Rica is no exception.
The Consejo Nacional de Supervisión del Sistema Financiero (Conassif) – National Council of Supervision of the Financial System and the Superintendencia General de Entidades Financieras (Sugef) – General Superintendence of Financial Institutions – started a work commission that analyzes the issue.
“This group is also led by the Banco Central de Costa Rica (BCCR) – Central Bank. It has the participation of lawyers and technical experts who will prepare a proposal to address the issue and provide recommendations. At the moment they are in meetings and their work is expected to end in April,” explained Bernardo Alfaro, head of the Sugef.
Costa Rican financial institutions also use the Prime Rate, which is an indicator of the minimum interest rate that US banks charge their most important commercial clients.
In 2019, only 3.35% of total credit operations in foreign currency were referenced to Libor, while 3.50% was indexed to the Prime Rate.
However, the loans that are linked to Libor represent 58.29% of the total balance of foreign currency credits of the national financial system, according to data by the Sugef.
Another international index that could take the place of Libor is the Secured Overnight Financing Rate (SoFR) created by the Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from U.S. dollar (USD) LIBOR to a more robust reference rate.
Alberto Dent, president of Conassif, confirmed that these two options will be analyzed by the commission that will seek a replacement for Libor.
Although 87,442 dollar loans were indexed to Libor, at the end of 2019, the banks believe that the change will not generate more impact for the almost 66,500 debtors responsible for these loans, according to Gustavo Vargas, president of the Chamber of Banks and general manager of the Banco Nacional (BNCR).
“For months, the country’s banking and financial institutions have been working on the issue to promote their clients that have loans with Libor an orderly process of change at a new rate,” said Vargas, who added that “The banks will offer their clients the gradual and informed substitution of the rate linked to their credits”.
Amedeo Gaggion, director of Treasury at Scotiabank, the largest of the private banks in Costa Rica said that his bank uses only the Prime Rate as a reference for its longer-term operations, so the change will not generate effects on its customers.