Libor trap lurks in 2021 US stress tests
Using SOFR, borrowing could boom and revenues collapse
As Libor’s likely demise approaches, banks are fretting over how to model the adoption of replacement risk-free rates in next year’s round of US regulatory stress tests.
During March’s coronavirus-related economic shock, the spread between US dollar Libor and the secured overnight financing rate, SOFR, blew out. If a similar dislocation was applied in the 2021 stress test, banks would suffer a sudden drain in liquidity as borrowers tap into credit lines at rock-bottom rates. Meanwhile, an
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