Top Policymakers Emphasize Need for ‘Robust’ Alternate Reference Rates

Acting Comptroller of the Currency Michael Hsu today said that it is “imperative that banks continue careful planning” for the transition away from Libor to an alternate reference rate, such as the Secured Overnight Financing Rate, the Alternate Reference Rates Committee’s preferred Libor alternative. Speaking at a Financial Stability Oversight Council meeting today, Hsu said his agency expects “every bank, regardless of size, to demonstrate that its replacement rate selections are appropriate for the bank’s products, funding needs and operational capacities. In particular, we want to emphasize the importance of banks considering the strength of the fallback provisions they employ.”

At that same meeting, Federal Reserve Vice Chair for Supervision Randal Quarles emphasized that “Libor is over,” and expressed his support for SOFR, cautioning that “the ARRC does not support more than minimal use of other rates in capital markets or for derivatives, and market participants should not expect such rates to be widely available.”

Securities and Exchange Commission Chairman Gary Gensler also endorsed SOFR as a “robust” and “preferable” alternate rate, and also raised concerns about the Bloomberg Short-Term Bank Yield Index, or BSBY, which has been floated by some banks as a potential Libor replacement. Gensler said that that rate shares several of Libor’s flaws, including being susceptible to manipulation.

Treasury Secretary Janet Yellen observed that “we have reached a critical juncture, and more must be done to facilitate an orderly transition” away from Libor. She cautioned that “while important progress is being made in some segments of the market, other segments, including business loans, are well behind where they should be at this stage in the transition.”