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ARTICLE · 06 OCTOBER 2020

A Credit-Sensitive Supplement To SOFR: Borrowers' Objections

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During an economic downtown, LIBOR (and the interest rate on a LIBOR-priced loan) would likely increase. Because SOFR is a rate based on transactions secured by U.S.

United StatesFinance and Banking
David Duffee
David Duffee
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During an economic downtown, LIBOR (and the interest rate on a LIBOR-priced loan) would likely increase. Because SOFR is a rate based on transactions secured by U.S. Treasury obligations, it's possible that during an economic downtown SOFR (and the interest rate on a SOFR-priced loan) would not increase and would in fact decline. Thus, in times of economic stress, a bank's income from its SOFR-priced loans would decline, while its funding costs would increase.

As a result, some banks believe that the interest rate on SOFR-priced loans should be subject to increase by an additional spread that would reflect credit risk at a particular time.1 Market participants discussed the construction, use and implementation of such a credit-sensitive supplement during a series of recent meetings at the Federal Reserve Bank of New York. In the most recent such meeting, representatives of the borrower community expressed their views and pointed out some of the problems that they

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