The end of LIBOR could trigger another supply chain shock

OMFIF has just published my commentary on how supervisors may trigger the next inflationary supply chain shock by demanding banks stop using term LIBOR benchmarks in 2022 before most trade finance banks and corporates globally have systems and documentation in place for Term SOFR as a replacement benchmark. The transition to Term SOFR requires setting 'credit spread adjustment' for different tenors and agreeing customer credit margins with hundreds of thousands of corporate exporters around the world as about 80 percent of global trade in goods is dollarised. The Financial Stability Board only briefed peer central banks and supervisors globally in September, too late for many to decide national action plans for modernisation of systems and documentation with their banks and exporters.

Trade finance was complicated enough, and supply chains disrupted enough, without the further hassle of terminating Term LIBOR for global financing.

Complicating the systems changes needed for global trade, 1 January 2022 is also the date for updating WTO Harmonised System codes on over 350 products for import or export and revision of 1,500 harmonised US tariff codes.

Further disruption to trade in 2022 would worsen the inflationary outlook that many central banks hoped would ease by mid-2022.