On July 1, 2020, the FFIEC released the Joint Statement on Managing the LIBOR Transition to address the risks facing banking institutions due to the expected discontinuance of the London Interbank Offered Rate (LIBOR). LIBOR is not guaranteed past 2021, and this statement reminds institutions of the risks facing them as this important index rate is discontinued. The statement provides concise, straightforward insights into regulatory expectations for the LIBOR transition.
The statement identifies key risks facing institutions, including:
- Difficulties in measuring exposures and risks related to valuation and modeling due to reference rates changing
- Insufficient processes and controls to support transition
- Negative impact to consumers
- Operational disruptions due to third parties not being able to facilitate transition
- Potential litigation and negative impact to institutional reputation
To address these risks, institutions should formalize their transition efforts and consider taking these steps.
Assess exposure. Identify all financial contracts with customers and counterparties that reference LIBOR. Contracts could relate to loans, investments, derivatives, deposits, repurchase agreements, or borrowings.
Evaluate contracts. Review existing contracts to determine whether fallback provisions are established for the permanent change in a reference rate. If contracts do not provide for such a change, then steps should be taken to revise contracts to provide clear parameters for the change.
Evaluate consumer impact. If customer contracts reference LIBOR and do not identify a replacement rate, then a replacement rate needs to be identified. In addition to contract changes, this could also impact customer disclosures and servicing processes.
Evaluate third party service providers. Review third parties that provide valuation, pricing, modeling, accounting, and document preparation to determine whether they are capable of facilitating a transition away from LIBOR.
Establish a transition plan. The transition plan should include a project plan with defined milestones and completion dates. Consider creating a team to manage transition oversight, and periodically report progress to the board of directors and senior management.
For more information about the transition or the contents of the statement, contact us.