OCC: Legislation ‘could be helpful’ for transition from LIBOR

An official from the Office of the Comptroller of the Currency (OCC) on Thursday told Congress that legislation could help address systemic risks associated with the cessation of LIBOR (London Interbank Offered Rate) by encouraging a shift to an appropriate alternate reference rate for financial contracts.

In testimony prepared for a hearing of the House Financial Services subcommittee on investor protections, OCC Deputy Comptroller for Market Risk Policy Kevin Walsh said his agency has been working with supervised banks since 2018 to ensure they are prepared for LIBOR’s demise. “To avoid the risk of market disruptions, prolonged litigation, and adverse financial impacts, the OCC has stressed to banks we supervise the importance of adequate transition planning and successfully executing those plans before LIBOR ceases to be reported,” he said in his written testimony.

LIBOR, widely used by financial institutions as a reference rate for adjustable-rate mortgages and other loan contracts, is being phased out because the transactions it is based on don’t occur as often as they did in prior years. The rate is scheduled to be phased out at the end of this year in most cases, but Walsh noted that banking regulators in November issued a joint letter noting that existing “legacy contracts” (those in force now and using LIBOR as a reference rate) have until June 2023 to complete the phase-out.

“To further assist with the transition, the OCC appreciates Congress’ efforts to clarify contracts that do not have a fallback provision or a new rate as designated in the draft Adjustable Interest Rate (LIBOR) Act of 2021,” Walsh said. “Legislation could be helpful in addressing systemic risks associated with the LIBOR cessation by incentivizing financial counterparties to agree to an appropriate reference rate or otherwise designating SOFR [Secured Overnight Financing Rate] as the replacement rate.”

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