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New Headwinds for Regional Banks—Term SOFR Spreads Price-In Counterparty Risk

Published on May 26, 2023

U.S. regional banks, already under pressure from recent rate hikes, are watching the cost of hedging their loan books increase significantly. As LIBOR’s cessation date of June 30 approaches, and more regional banks move their loans to Term SOFR, dealers are quoting bid/offer spreads as wide as 10 basis points, up from less than 1bp. The latest pricing trends are a result of concerns around counterparty risk and a widespread shift away from cleared LIBOR swaps to more narrowly traded bilateral contracts that causes additional pressure on smaller lenders.

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