The federal banking agencies today issued a statement reiterating that they are not endorsing a specific replacement rate for the London Interbank Offered Rate. Libor is not guaranteed to be available past 2021, and the banking industry currently working through preparations to transition loans away from Libor.
“A bank may use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs,” the agencies said. “However, the bank should include fallback language in its lending contracts that provides for use of a robust fallback rate if the initial reference rate is discontinued.”
The agencies added that they recognized that banks’ funding models differ and that “in structuring their lending activities it is appropriate for banks to select suitable replacement rates for Libor that are most appropriate given their specific circumstances,” including rates that are credit sensitive—unlike the Secured Overnight Financing Rate, which is the preferred alternative of the Alternative Reference Rates Committee. “Examiners will not criticize banks solely for using a reference rate, including a credit-sensitive rate, other than SOFR for loans.”