United Kingdom: Prospect of negative interest rates adds to issues to be considered in LIBOR transition

In brief

On 12 October 2020, the UK Prudential Regulation Authority (PRA) published Dear CEO letters. In the letters, Sam Woods, the Bank of England deputy governor and PRA CEO, commenced his engagement with the largest UK deposit-taking banks over the prospect of zero or negative interest rates. Whilst we are yet to see the Monetary Policy Committee make a move to negative rates, the prospects for this have increased.

As the loan market transitions away from the use of London Interbank Offered Rates (LIBORs) to alternative near risk-free rates (RFRs) by the end of 2021 (or June 2023 in the case of most USD LIBOR tenors), lenders and borrowers should focus on the impact of negative rates in applying those RFRs in practice, including the use of interest rate floors and the interaction with any loan-linked hedging.


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