Mid-sized banks are pushing back against the Federal Reserve's one-size-fits-all solution to the transition off Libor and asking for regulatory support for an alternative.
In a letter addressed last week to regulators, 10 banks spoke out in favor of an alternative reference rate called the American Interbank Offered Rate (Ameribor), saying that the Federal Reserve's preferred Secured Overnight Financing Rate causes an asset-liability mismatch in their part of the banking sector.
Chief executives at Arvest Bank, Associated Banc, Brookline Bancorp, Flagstar Bancorp, First Merchants, Cullen/Frost Bankers, Old National Bancorp, PacWest Bancorp, ServisFirst Bancshares and Signature Bank addressed the letter to the Fed, the Comptroller of the Currency and the Federal Deposit Insurance Corporation on February 26.
The banks argued that SOFR is a good alternative for large investment banks that hold many secured government Treasury notes.
But mid-sized regionals mostly hold unsecured assets, and linking bonds and loans to the secured transactions that SOFR tracks as a benchmark is not reflective of their business.
"That presents an immediate asset-liability imbalance and potentially creates distortions in times of financial stress," the banks wrote in the letter.
"During a financial crisis, overnight liquidity becomes a priority and the value of collateral would rise, leading to increased borrowing costs for banks irrespective of their asset size and affecting credit availability."
To help solve this problem the banks are backing the American Financial Exchange's (AFX) Ameribor alternative reference rate.
More than 175 AFX member banks back the rate, representing US$2.2trn in assets or 12% of the US banking sector, according to the letter.
Daily volumes on AFX average US$2bn, while SOFR averages some US$800bn in Treasury and repo market transactions, according to the New York Federal Reserve.
West Coast-based MUFG Union Bank has been the only US regional bank to issue bonds in SOFR. It priced a US$300m three-year floater at 71bp over SOFR in December.
But most regional banks have stuck to Libor.
For example, PNC Bank priced a US$1bn three-year non call two floating rate note that priced at three-month Libor plus 32.5bp last month. The first call date and final maturity will arrive after the December 2021 Libor transition deadline.
"We support the transition away from Libor, but as mid-sized institutions, we caution against a single benchmark," the banks wrote in the letter.
"Given its unsecured nature, Ameribor is gaining greater traction and we encourage other banks to take note."