With the future of Libor uncertain beyond 2021, the FDIC’s Winter 2018 Supervisory Highlights provides an overview of steps for banks to take to help transition to an alternative reference rate. The FDIC noted that “examiners will not be examining financial institutions for Libor planning or criticize risk management of loans or deposits merely because they use Libor as a reference rate.”
Among other things, banks wishing to be proactive about the Libor transition could conduct assessments to determine the extent of their Libor-linked assets, liabilities and derivative contracts maturing after 2021; consider using a different reference rate after 2021 or incorporating fallback language into new contracts to facilitate a smooth transition to an alternative reference rate; and determine which existing contracts may need revision if Libor is no longer available.
“Sound planning goes beyond selecting interest rates to also assessing the comprehensive effect of the risks associated with a potential transition in reference rates on the whole institution in areas such as information technology, management information systems, accounting (including hedge accounting and valuation), governance, compliance and internal control structures,” the FDIC added.
