After two postponements earlier in the year due to Covid-19, the 23rd Annual Milken Institute Global Conference kicked off virtually on October 12th, 2020 .
This year, we present a RealClearMarkets exclusive interview with Richard Sandor, Chairman and of the American Financial Exchange (AFX), and fellow of the Milken Institute. He is considered the “Father of Financial Futures.”
LIBOR could claim over $350 Trillion of assets priced on it, but it is now planned to be phased out by 2021. It will be replaced by other benchmark rates. The U.S. Treasury’s Secured Overnight Financing Rate (SOFR) is being considered. SOFR is really designed to serve the largest banks, institutions, and corporations. One of the other U.S. based rates is Sandor’s AMERIBOR (American Interbank Offered Rate.)
Both referenced rates are market priced, which is a tremendous advantage over LIBOR. However, SOFR is really designed to serve the largest banks and corporations. Sandor’s AMERIBOR offers an alternative that better matches the capital costs of regional medium and small size community banks and companies, including minority owned banks and their customers.
I first met Dr. Richard Sandor over 20 years ago at the Milken Institute Global Conference, and always enjoyed listening to his thought-provoking panel presentations. I caught up with Dr. Sandor by telephone in late October.
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Hello Dr. Sandor, welcome.
Q1) As LIBOR is being phase out in 2021, could you tell us briefly about the status of the transition, given business disruptions due to Covid-19. Given the vagaries brought on by the virus, will we still meet the December 31, 2021 target date to be transitioned out of LIBOR?
Sandor replied that he does believe the target date will still be met as “preparations by the banks are high.”
Q2) Dr. Sandor, you are a fellow at the Milken Institute, and you have participated in the Milken Institute's Center for Financial Markets (CFM), which is researching the constraints placed on local financial institutions, like the Community Development Financial Institutions and Minority-owned Depository Institutions (MDIs), and is designing strategies to provide increased growth capital and financing in these underserved communities. All of this in mind, could you describe some of the constraints that are inhibiting access to capital and financing in underserved communities?
Sandor observed there are issues that are problematic. He stated there are 140 plus Minority Depository Institutions and about 21 African American Institutions in the country, and they have the ability to provide capital within the local community. they have very capable underwriting standards, plus they're increasing the amount of loans in their communities. “But they need two things to happen. They need to have more equity capital, and more loan participation outside their own communities. Like all banks today, MDIs are flush with cash.”
He stated the AFX is “working with AFX’s MDIs to provide a way for them to participate in loans that are made by larger institutions. They need two things: Equity and access to high-quality loans and loan participation.” He added AFX “is working strongly on the latter (access to loan participation) with AFX’s regional and midsize banks to develop a mechanism to loan flow from the larger banks into the minority-owned banks.”
Asked about helping intermediate equity investments, Sandor noted that the larger banks are working on it. AFX member banks are not.
Q3) Could you share with us a brief description of SOFR as well as your AMERIBOR benchmark, and describe why AMERIBOR is a better reference rate for smaller banks, especially minority owned ones?
“AMERIBOR is a dual-purpose product. AFX provides an exchange for overnight unsecured lending. That is a dual-purpose product. One, it is for banks to have access to a peer-to-peer fintech network to borrow and lend for liquidity purposes. The second purpose is the calculation of the daily weighted-average of the interest rate on that market, which is AMERIBOR.”
“By definition, AMERIBOR reflects the costs of borrowing. If they know what their costs are, they can lend appropriately. SOFR reflects secured risk-free interest rate. AMERIBOR represents an interest rate that reflects credit risk and therefore is useful in asset-liability management for AFX’s banks to lend at rates based on AMERIBOR, so their costs and revenues are tied together.”
In materials provided to the author by AFX, the AMERIBOR is a volume-weighted average of daily transactions in the AFX’s overnight unsecured loan market.
Q4) Dr. Sandor, in a recent Op-Ed, you wrote: “Building on government programs, new initiatives are needed to increase the flow of funds to minority-owned banks and their communities. Expanding lending to minority entrepreneurs and businesses will significantly impact the real economy——financing new companies and create jobs.”
What is your perception of the best means to achieve these goals – large/small bank partnerships, government intervention, Federal Reserve regulation?
Sandor responded “the best combination is the Private/Public Partnerships where vehicles are created that can enhance the ability to leverage the knowledge of minority owned banks to reach entrepreneurs within their communities. Programs that could be developed include SBA guarantees, and opportunity zones attracting capital into different areas. There are a variety of tax incentives or guarantees coupled with private capital that can be focused on the African American community.” Sandor stressed this should be part of our public policy.
Q5) Weren’t many minority-owned businesses already without a traditional banking relationship and thus were not getting the funding they needed, even before the pandemic? Challenges often include the need to get a loan for very small amounts, or to get a reprieve on a mortgage. Did community banks come in to fill the need by servicing the Paycheck Protection Program (PPP)?
Sandor explained the “community banks did an enormous number of PPP loans relative to their size,” indicating that they performed very well, and he is impressed by how hard they worked with staff working on weekends. They produced a proportionately significant amount of the PPP programs. The community banks are able to get into and service loans in communities that the large money center bank wouldn’t.
Sandor gave an example of Citizen’s Trust Bank in Atlanta, an African American owned bank, which wrote a loan for $400, which is not something a big bank would do or could do, as they lack the underwriting ability. The small banks “reach into the communities and put the money where it can do the most good and be successfully underwritten,” Sandor says. He says it’s not that the big banks are not doing their job, “but rather the PPP program allowed the community banks and mid-size banks to do what they do best: Underwrite into the small and mid-size market. This is what is important.”
Q6) Could you explain how the policies of the Trump administration have helped or hindered the minority owned banks and businesses?
Sandor observed that at this point, he doesn’t have a particular view of this. He did explain “the most important thing has been the bi-partisan effort that occurred with the PPP program. Sandor wishes for ‘more bi-partisanship’ especially with regards to small and medium size businesses. This is a precious resource. We need a bi-partisan approach.’”
Update: On November 6th, in a joint statement, banking regulators told financial institutions they can choose any reference rate to replace the LIBOR. The regulators endorsed SOFR as the best replacement, but said that the “use of SOFR is voluntary and banks may use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs.” The statement comes after multiple small and midsize institutions had warned the agencies that the secured overnight financing rate was ill-suited to them. Many small and medium-sized banks said that that they would prefer to use Sandor’s AMERIBOR.
