Frequently Asked Questions

LIBOR Transition

What is LIBOR?

The London Interbank offered Rate (LIBOR) is a benchmark for short-term interest rates, ranging from overnight to one year terms, across many different currencies. As a critical component of the financial system, it is used in a wide range of financial products, including adjustable-rate residential mortgages (‘ARMS’), floating-rate commercial loans and commercial loan interest rate swaps.

Why is LIBOR going away?

The Great Recession, which began with the 2007 U.S. housing market downturn, prompted the first major concerns over LIBOR’s credibility, as the rate behaved in unpredictable and volatile ways. As a result, the number of interbank funding transactions in the LIBOR market declined, and the basis for determining LIBOR has become reliant on hypothetical transactions and expert judgement, rather than actual transactions, allowing for the index to become susceptible to rate manipulation. For those reasons, the sustainability of LIBOR presents a source of vulnerability to the financial market and has led bank regulators to begin looking for a replacement benchmark.

When is LIBOR going away?

The U.K. Financial Conduct Authority (“FCA”, the regulator of LIBOR) and the ICE Benchmark Administration (“IBA”, the administrator of LIBOR) announced on March 5, 2021, that the IBA will cease publication of the 1-week and 2-month USD LIBOR terms following the publication thereof on December 31, 2021; and cease publication of USD LIBOR for the overnight, 1-month, 3-month, 6-month and 12-month terms immediately following the IBA publication thereof on June 30, 2023. U.S. regulatory agencies (including the Federal Reserve Board, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation) have issued guidance encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.  Therefore, Bangor Savings Bank does not plan to use LIBOR after 2021 for any new transactions, and existing contracts will need to be amended to an alternative rate on or before June 30, 2023. The respective announcements by the FCA, IBA and the U.S. Regulatory Agencies, along with a statement issued by the Alternative Reference Rates Committee (ARRC), are available on the Resources & Insights page for your convenience.

How does the USD LIBOR index impact my loan’s adjustable interest rate?

When you apply for a loan or line of credit, the amount you borrow is known as the principal. Interest is the amount that you pay over a certain period-of-time to borrow the money. The amount of interest that you pay over the life of that loan, and in your monthly loan payment, is determined by your interest rate (as well as other loan terms).

For an adjustable-rate (ARM) residential mortgage and lines of credit, your interest rate is determined by using two numbers: the index and the margin.

Interest Rate = Index + Margin

The index is a benchmark rate, like LIBOR, that reflects market conditions and changes based on the market. While there are many benchmark rates in the marketplace, LIBOR, U.S. Prime and the Constant Maturity Treasury Index (CMT) are the most common. The margin is the number of basis points or percentage being added to the index by the lender to get your total interest rate.

How is Bangor Savings preparing for the cessation of LIBOR?

Bangor Savings has formed a cross-functional project team to create a comprehensive plan to manage the transition from LIBOR into an alternative reference rate.  We will closely monitor industry developments regarding the discontinuance of LIBOR, and evaluate the best options as the market identifies preferable alternatives, including the Secured Overnight Financing Rate (SOFR) and other emerging benchmarks. Over the coming months we will continue to share information and initiate meaningful discussions with our customers about transitioning from LIBOR to a replacement benchmark.