The Office of the Comptroller of the Currency (OCC) published a bulletin that provides an updated self-assessment tool for banks to evaluate their preparedness for cessation of the London Interbank Offered Rate (LIBOR). This bulletin applies to community banks, but the applicability of some concepts depends on the nature and extent of the LIBOR exposure of a bank. The updated self-assessment tool includes questions and considerations regarding the robustness of replacement rates.
Bank management can use this self-assessment tool to evaluate the bank’s risk management process for identifying and mitigating LIBOR transition risks. However, not all sections or questions in the tool apply to all banks. Bank management should tailor the bank’s risk management process to the size and complexity of the bank's LIBOR exposures. OCC expects banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and no later than December 31, 2021. OCC specifies that when assessing a replacement rate, bank management should evaluate whether the:
- rate always reflects competitive forces of supply and demand and is anchored by a sufficient number of observable arm’s-length transactions, during all market conditions including periods of stress.
- rate’s underlying historical data are extensive, spanning a variety of economic conditions.
- rate’s administrator maintains durable methodology and governance processes to ensure the quality and integrity of the benchmark through periods of market stress.
- rate’s transparency provides market participants the ability to understand the methodology, permitting them to independently substantiate the rates published.
- market for financial instruments that use the rate is sufficiently liquid to allow for the effective management of market risk.
Moreover, when assessing preparedness, bank management should consider whether the bank’s progress in preparing for the transition is sufficient. LIBOR exposure and risk assessments and cessation preparedness plans should be complete or near completion with appropriate management oversight and reporting in place. When assessing preparedness, most banks should be working toward resolving replacement rate issues while communicating with affected customers and third parties, as applicable.
Keywords: Americas, US, Banking, LIBOR, Benchmark Reforms, Self-Assessment Tool, Risk-Free Rates, LIBOR Transition, OCC
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