Libor Change: ‘Law of Physics’ Prompting Examination Focus, Self-Assessment Tool

Federal Reserve Vice Chairman for Supervision Randy Quarles recently remarked, “Market participants have had many years to prepare for the end of Libor, yet over the last few years they have actually increased use of Libor . . . That must obviously change this year—that’s just the laws of physics—and the firms we supervise should be aware of the intense supervisory focus we are placing on their transition and especially on their plans to end issuance of new contracts by year end.”

Quarles’ speech also noted that all non-dollar Libor rates will cease to be published beginning December 31, 2021, as well as for one-week and two-month U.S. dollar Libor rates. By June 30, 2023, the remaining Libor rates will cease to be published. This highlights the importance of preparations to ensure a smooth transition from Libor.

In a recent ABA Accounting Committee discussion on the Libor transition, an ABA member emphasized, “If you haven’t heard from your examiner yet, you will.” To help facilitate these conversations, he recommended using the OCC’s Libor Transition Self-Assessment Tool. The tool acts as a primer to key areas including understanding and inventorying bank exposure, determination of replacement rates and amending contracts with fallback language. Bankers have found it useful, as it provides common ground for discussing the bank’s transition plan with its examiner.

With that in mind, significant “open items” related to the transition remain. For example, despite targeting the goal of an established term rate by mid-2021, the Alternative Reference Rate Committee recently stated that it will not be in a position to recommend a forward-looking Secured Overnight Financing Rate term rate. This leaves questions regarding the specific replacement rates to write into fallback language within existing contracts.

Overall, the Libor transition is something bankers will want to have their arms firmly wrapped around.

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Josh Stein

Josh Stein is VP for accounting policy at ABA.