Libor trap lurks in 2021 US stress tests

Using SOFR, borrowing could boom and revenues collapse

Dollar-Libor-stress-tests montage

As Libor’s likely demise approaches, banks are fretting over how to model the adoption of replacement risk-free rates in next year’s round of US regulatory stress tests.

During March’s coronavirus-related economic shock, the spread between US dollar Libor and the secured overnight financing rate, SOFR, blew out. If a similar dislocation was applied in the 2021 stress test, banks would suffer a sudden drain in liquidity as borrowers tap into credit lines at rock-bottom rates. Meanwhile, an

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