Federal regulators on Friday issued a statement urging banks to begin working “without delay” to transition away from LIBOR (the London Interbank Offered Rate) as a reference rate in their loan contracts.
“A bank may use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs,” according to the statement issued jointly by the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC). “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 said they encourage banks to determine appropriate reference rates for lending activities “and begin transitioning loans away from LIBOR without delay” and to step up outreach to ensure their customers are prepared.
According to an FDIC Financial Institution Letter (FIL 104-2020) on the statement, the federal banking regulators are not endorsing a specific replacement rate for LIBOR for loans. Instead, it notes that:
- 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.
- It is appropriate for banks to select suitable replacement rates for LIBOR that are appropriate given the needs of the bank as well as its customers.
- The Alternative Reference Rates Committee recommended the Secured Overnight Financing Rate (SOFR) as its preferred alternative for both cash and derivative transactions. The use of SOFR, however, is voluntary.
- Examiners will not criticize banks solely for using a reference rate other than the SOFR for loans.