Supervision ramping up as agencies evaluate institutions for LIBOR transition preparedness, plans

Federal and state regulators on Wednesday urged financial institutions to continue working to transition away from using LIBOR (the London Interbank Offered Rate) as a reference rate in any products, and they said supervision of this work will increase this year and next, “particularly for institutions with significant LIBOR exposure or less-developed transition processes.”

In July 2017, the United Kingdom Financial Conduct Authority said it had intervened to preserve LIBOR’s continued publication through the end of 2021 but that it could not guarantee the continuation of LIBOR after that. In a joint statement issued under the auspices of the Federal Financial Institutions Examination Council (FFIEC) – including the heads of the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), and the State Liaison Committee – regulators noted the “significant effort” involved in preparing for the transition.

“While some smaller and less complex institutions may hold little to no LIBOR-denominated assets and liabilities, the change will affect almost every institution,” the FFIEC agencies said in issuing the statement. “Impact is expected to be particularly significant for the largest institutions and those engaged materially in capital markets activities such as interest rate swaps, other derivatives, or hedging transactions.”

The FFIEC statement notes that financial institutions can have a variety of on- and off-balance sheet assets and contracts that reference LIBOR, including derivatives, commercial and retail loans, investment securities, and securitizations. It also notes potential references to LIBOR on the liability side, for example, Federal Home Loan Bank advances; other borrowings; derivatives; and capital instruments, including subordinated notes and trust preferred securities. “Moreover, many market participants rely on LIBOR for discounting and other purposes,” it adds.

The joint statement addresses risks to institutions, assessing LIBOR risk exposure, contract fallback language (providing for alternative reference rates), consumer impact, third-party service provider considerations, and supervisory activities.

The FFIEC agencies said that in 2020 and 2021, during regularly scheduled examinations and monitoring activities, supervisory staff will ask institutions about their planning for the LIBOR transition, including the identification of exposures, efforts to include fallback language or use alternative reference rates in new contracts, operational preparedness, and consumer protection considerations.

“All institutions should have risk management processes in place to identify and mitigate their LIBOR transition risks that are commensurate with the size and complexity of their exposures,” the regulators said. “Supervisory focus will be tailored to the size and complexity of each institution’s LIBOR exposures. Large or complex institutions and those with material LIBOR exposures should have a robust, well-developed transition process in place.”

For smaller institutions and those with limited exposure to LIBOR- indexed instruments, “less-extensive and less-formal transition efforts may be appropriate,” they stated.

Financial Regulators Issue Statement on Managing the LIBOR Transition

Joint Statement on Managing the Libor Transition

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