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    US Agencies Issue Proposals on LIBOR Act and Debt Restructuring

    July 28, 2022

    The Board of Governors of the Federal Reserve System (FED) is inviting comments on a proposed regulation that would implement the Adjustable Interest Rate (LIBOR) Act. Moreover, the Federal Deposit Insurance Corporation (FDIC) issued a proposal to incorporate the updated accounting standards in the risk-based deposit insurance assessment system applicable to all large and highly complex insured depository institutions. Additionally, the Office of the Comptroller of the Currency (OCC) is soliciting comments concerning the renewal of its information collection titled “Annual Stress Test Rule.”

    Proposal to implement LIBOR Act

    LIBOR, in its current form, will be discontinued after June 30, 2023. The proposed rule would establish benchmark replacements for contracts governed by U.S. law that reference certain tenors of U.S. dollar LIBOR (the overnight and one-, three-, six-, and twelve-month tenors) and that do not have terms that provide for the use of a clearly defined and practicable replacement benchmark rate following the first London banking day after June 30, 2023. The proposed rule also would provide additional definitions and clarifications consistent with the Adjustable Interest Rate (LIBOR) Act. The proposal identifies separate Board-selected replacement rates for derivatives transactions, contracts where a government-sponsored enterprise is a party, and all other affected contracts. As required by the law, each proposed replacement rate is based on the Secured Overnight Financing Rate. Comments on the proposal must be submitted by August 29, 2022.

    Proposal to incorporate Accounting Standards Update

    FDIC calculates deposit insurance assessment rates for large and highly complex insured depository institutions based on supervisory ratings and financial measures, including the underperforming assets ratio and the higher-risk assets ratio, both of which are determined, in part, using restructured loans or troubled debt restructurings. FDIC is proposing to include “modifications to borrowers experiencing financial difficulty,” an accounting term recently introduced by the Financial Accounting Standards Board (FASB) to replace troubled debt restructurings, in the underperforming assets ratio and higher-risk assets ratio for purposes of deposit insurance assessments. FDIC is proposing to:

    • expressly define restructured loans in the underperforming assets ratio to include “modifications to borrowers experiencing financial difficulty.”
    • amend the definition of a refinance for the purposes of determining whether a loan is a higher-risk commercial and industrial loan or a higher-risk consumer loan, both elements of the higher-risk assets ratio. Under the proposal, a refinance would not include modifications to a loan that otherwise would meet the definition of a refinance, but that result in the classification of a loan as a modification to borrowers experiencing financial difficulty.

    This proposal would not affect the small bank deposit insurance assessment system. FDIC is requesting comments by August 26, 2022. The proposed rule does not revise any of these existing assessment information collections. However, the proposed rule affects the agencies' current information collections for the Call Report (FFIEC 031 and FFIEC 041, but not FFIEC 051). Although, proposed changes to the Call Report forms and instructions will be addressed in a separate Federal Register notice.

    Notice on renewal of information collection titled “Annual Stress Test Rule”

    OCC is requesting comments, until August 29, 2022, concerning the renewal of its information collection titled “Annual Stress Test Rule.” The annual stress test rule implemented Section 165(i) of the Dodd-Frank Act, which requires certain companies to conduct annual stress tests. Section 165(i)(2) of the Dodd-Frank Act required certain financial companies, including national banks and Federal savings associations, to conduct annual stress tests and requires the primary financial regulatory agency of those financial companies to issue regulations implementing the stress test requirements. OCC may use the results of the stress tests to determine whether additional analytical techniques and exercises could be appropriate to identify, measure, and monitor risks at the covered institution. The stress test results support ongoing improvement in a covered institution's stress testing practices with respect to its internal assessments of capital adequacy and overall capital planning. Each covered institution is required to establish and maintain a system of controls, oversight, and documentation, including policies and procedures, describing the covered institution's stress test practices and methodologies, and processes for validating and updating the covered institution's stress test practices. Each covered institution is required to report the results of their stress tests to OCC annually. A covered institution publish a summary of the results of its annual stress tests on its website or in any other forum that is reasonably accessible to the public.

     

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    Keywords: Americas, US, Banking, Securities, LIBOR, SOFR, Benchmark Reforms, Interest Rate Benchmark, Lending, Credit Risk, Accounting Standards Update, Reporting, Stress Testing, FFIEC 031 041, Call Reports, Dodd Frank Act, FDIC, FED, OCC

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