FFIEC, on behalf of its members, issued a joint statement on managing the transition away from the London Interbank Offered Rate (LIBOR). The statement highlights the financial, legal, operational, and consumer protection risks that will result from the expected discontinuation of the LIBOR for institutions with exposure to the LIBOR reference rate. Institutions with LIBOR exposure should have appropriate risk management processes in place to identify and mitigate transition risks. In reference to this statement, FDIC also published a Financial Institution Letter (FIL-68-2020) that applies to all FDIC-supervised institutions with total assets exposure of under USD 1 billion to the LIBOR reference rate.
The financial services industry used LIBOR as a short-term reference rate to price variable rate loans and securities, deposits, borrowings, and interest rate hedging transactions. While some smaller and less complex institutions may hold little to no LIBOR-denominated assets and liabilities, the change will affect almost every institution. 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 statement highlights a number of potential preparedness and risk management actions that institutions should factor into their planning for the transition. Institutions should consider existing safety and soundness standards and consumer protection laws as they plan for and address risks that will arise with the transition from LIBOR. Careful planning will help institutions avoid financial losses or consumer harm. The following are the key highlights of the joint statement:
- Institutions should identify and quantify their LIBOR exposures to effectively plan for the transition and mitigate potential financial, legal, operational, and consumer protection risks.
- Institutions with LIBOR exposure should have commensurate with the size and complexity of the institution, its activities, and extent of exposure.
- Fallback language in financial contracts will determine how the replacement of a discontinued reference rate will be handled. Institutions with LIBOR-indexed contracts should take steps to include appropriate fallback language that considers a permanent discontinuation of the reference rate to avoid potential legal and safety and soundness risk.
- Transition plans should address consumer protection risk, including required disclosures to consumers regarding changes in terms and advanced communication for consumers to help them understand how new reference rates would affect their payments, Annual Percentage Rate, and other terms.
- Given the significant effort involved in preparing for the transition, the supervisory focus on evaluating institutions’ preparedness for the LIBOR discontinuation will increase during 2020 and 2021, particularly for institutions with significant LIBOR exposure or less-developed transition processes.
Keywords: Americas, US, Banking, LIBOR, Risk Free Rates, Benchmark Reforms, Interest Rate Benchmarks, FDIC, FFIEC
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Bank for International Settlements (BIS) published bulletins on lending in decentralized finance (DeFi) system, on blockchain scalability and fragmentation of crypto, and on extractable value and market manipulation in crypto and decentralized finance.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.