Some loan holders may need to rewrite their contracts; changes will depend on the LIBOR index

It is not clear if it will be destroyed

Viktorija Kadzevič, Chief Specialist of the Credit and Insurance Services Supervision Division of the Bank of Lithuania, told Delfi that the Financial Policy Committee of the UK Financial Services Authority and the Bank of England noted that the decline in activity in the interbank loan market raises serious doubts about the sustainability of the future LIBOR (London Interbank Offered Rate) index.

According to her, even then an agreement was reached between institutions and banks that provided data on the index to maintain the index until the end of 2021, and the period until the end of 2021 should be considered transitory, more so that banks and other participants leave the LIBOR index and switch to alternative interest rates. .

“To the knowledge of the Bank of Lithuania, the possibility of extending the transition period is currently being considered, but we have no information on the final decision,” said an LB specialist about the LIBOR index.

According to preliminary data available to the Bank of Lithuania, if the LIBOR index is not extended by the end of 2021, taking into account the loan repayments expected by the end of next year, in 2022. January 1 There should be around 28 thousand in Lithuania. credit contracts linked to the LIBOR index entered into with individuals, which is around 2.3 percent. total loan portfolio.

Interest should not increase, contracts may need to be rewritten

The LB specialist, V. Kadzevič, assured that the changes expected by those whose loans are related to this index would depend on the terms of the contract, so, as emphasized, it should be verified whether the contract with the financial company does not specify clearly a replacement index rate.

“If such a rate is specified, then it is the LIBOR rate that must be changed. If the contract does not specify a replacement interest rate, it will be necessary to rewrite the contract.

The rewriting of the contract is likely to begin next year and end in 2021. or the end of the extended transition period if that period is extended. According to the Bank of Lithuania, commercial banks operating in Lithuania plan to offer clients to change LIBOR-related contracts, ”said the specialist.

According to her, when receiving a proposal from a bank to modify the credit agreement, it should be noted that the index that replaces LIBOR must be indicated.

The expert cited the EURIBOR, longer-term risk-free interest rate indices, the replacement rate established by the European Commission and the fixed interest rate as the most likely interest rates to replace LIBOR.

“If the offer made by the credit holder’s bank is not satisfactory or has not been received at all, in cases where the contract is not modified by the end of 2021 (or at the end of the extended transition period), the Commission The European Union must apply the legal replacement rate, SRR), unless the current contract linked to LIBOR explicitly establishes a replacement rate ”, said the specialist.

When asked if the abolition of the index could lead to changes in the population interest rate, Kadzevich explained that the alternative indexes used to replace LIBOR should not differ significantly from the indexes previously used in the contracts.

“Please note that only the benchmark and the credit terms associated with it (eg credit interest rate type, calculation procedure, etc.) need to change in credit agreements. EU institutions emphasize that the conditions of the users to whom the index will be switched should not worsen, that is, other conditions not related to the benchmark should not be changed. Banks should only select benchmarks that meet the requirements of index reform. <..>

Therefore, if the general market situation does not change, the change in the benchmark itself should not have a significant impact on the interest payments of the population, since the variable interest rate is determined based on the market situation, ”he added, adding that the Bank of Lithuania carefully assesses commercial banks operating in Lithuania. implement changes so as not to harm the interests of consumers.

Banks are preparing for change

Representatives of the main Delfi banks, SEB, Luminor and Swedbank, asked if the banks were preparing for the destruction of the LIBOR index and how the interest rate would be recalculated.

Swedbank representatives said that those who do not yet have precise knowledge that LIBOR would expire in 2021 have not yet done so.

“Unfortunately, therefore, we cannot comment further at this time,” said the reply received.

The representatives of SEB and Luminor asked the Lithuanian Banking Association (LBA) to submit their application. In summary, its president Eivilė Čipkutė stated that banks operating in the country are constantly preparing for the changes related to the abolition of the LIBOR interbank interest rate index.

“In the implementation of the European Union regulation, in the long term, contracts for financial products, mainly credit, that have used LIBOR, should be adjusted accordingly.

The change in the index should not reflect the amount of interest and premium. Customers with such contracts do not need to do anything additional at this time: the banks will contact them and provide them with all the necessary information. A transition period is foreseen for the implementation of the changes until 2021. but this date is not final, ”he said.

According to the LBA, when evaluating the total loan portfolio granted in Lithuania, the credit contracts linked to the LIBOR interbank interest rate index in euros represent around 2%.

At that time, most of the credit contracts were linked to the EURIBOR interbank interest rate index. The values ​​of the EURIBOR index are published periodically by the European Monetary Markets Institute (EMMI), of which the LBA is a member.