Finance · Global Reference Rates
Which of the following describes the most fundamental and practical challenge faced by banks when transitioning large volumes of existing long-term loans (e.g., 5-10 years) from the discontinued forward-looking LIBOR to the new backward-looking SONIA for interest calculat ion?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The requirement for the bank to obtain regulatory approval from the Bank of England for every single loan conversion, delaying the entire process.
- 2The inability of banks to charge a Credit Adjustment Spread (CAS) because SONIA is a risk-free rate that does not inherently include a credit premium.
- 3The difficulty in predicting the interest rate for the upcoming quarter, as the SONIA rate for the interest period is only fully known at the end of the period.✓
- 4The need to retrospectively adjust all past interest payments for the last five years of the loan tenure based on the compounded SONIA rate.
Correct answer
The difficulty in predicting the interest rate for the upcoming quarter, as the SONIA rate for the interest period is only fully known at the end of the period.
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