Agencies issue joint reminder that U.S. dollar LIBOR ends June 30; urges banks, credit unions to ensure they have ready alternatives

U.S. dollar (USD) London Inter-Bank Offered Rate (LIBOR) panels end June 30, and banks and credit unions are expected to complete their transition of remaining LIBOR contracts as soon as practicable, the federal banking, credit union and consumer protection agencies said in a joint statement Wednesday.

“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 agencies said in the statement.

Issued jointly by the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and in conjunction with the state bank and credit union regulators, the statement acknowledged that financial institutions have reported “significant progress” in their LIBOR transition efforts.

“However, work remains for institutions to prepare for the end of the USD LIBOR panels,” the agencies advised. “Institutions are encouraged to ensure that replacement alternative rates are negotiated where needed and in place in advance of June 30, 2023, for all LIBOR–referencing financial contracts including investments, derivatives, and loans. Institutions are also encouraged to work expeditiously with their customers and coordinate with other institutions as needed in these efforts.”

The statement also reminds institutions that Congress passed the LIBOR Act in 2021 (backed up by a Fed regulation in January), designed to assist institutions in dealing with so-called “tough legacy contracts.” The statement described those as contracts which reference USD LIBOR and will not mature by June 30, but which lack adequate fallback provisions providing for a clearly defined or practicable replacement benchmark following the cessation of USD LIBOR.

“Examiners will continue monitoring efforts through 2023 to ensure that institutions have moved their contracts away from LIBOR in a safe and sound manner and in compliance with applicable legal requirements,” the statement notes.

The statement also outlines that safe-and-sound practices include conducting due diligence necessary to ensure that alternative rate selections are appropriate for the institution’s products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities.

“As part of their due diligence, institutions should understand how their chosen reference rate is constructed and be aware of any fragilities associated with that rate and the markets that underlie it,” the agencies stated.

Joint Statement on Completing the LIBOR Transition