In a joint statement today, the federal and state banking regulators emphasized that supervised institutions are expected to continue to transition away from Libor ahead of the scheduled Dec. 31, 2021 sunset of several Libor tenors. “Failure to adequately prepare for Libor’s discontinuance could undermine financial stability and institutions’ safety and soundness and create litigation, operational and consumer protection risks,” the statement said.
The OCC, Federal Reserve, and FDIC previously said that supervised institutions should stop entering into new contracts that use Libor as a reference rate “as soon as practicable,” but no later than Dec. 31, and that supervised institutions may use any reference rate for loans that they determines to be appropriate based on customer need and their funding model.
Today’s statement includes a number of considerations that banks should take into account when selecting a reference rate, such as understanding how the chosen reference rate is constructed and being aware of any fragilities associated with it and the markets that underlie it. The agencies also noted that banks should develop and implement a transition plan for communicating with consumers, clients and counterparties, as well as ensure that systems and operational capabilities will be ready for transition to a replacement reference rate after Libor’s discontinuation.
Going forward, the regulators said, supervised institutions are encouraged to include fallback language in new or updated contracts that provides for using “a strong and clearly defined fallback rate” when the initial reference rate is discontinued.