FDIC Issues Clarification Regarding Treatment of Capital Instruments in LIBOR Transition

On July 29, 2021 the Federal Deposit Insurance Corporation (FDIC) released Answers to Frequently Asked Questions about the Impact of London Interbank Offered Rate (LIBOR) Transitions on Regulatory Capital Instruments. The FAQs clarify that the transition would not change the treatment of regulatory capital instruments (e.g., qualifying preferred stock or subordinated debt).

An FDIC summary of the FAQ’s included these highlights:

• The FAQs clarify that the agencies do not consider the replacement or amendment of a capital instrument (e.g., qualifying preferred stock or subordinated debt) that solely replaces a reference rate linked to LIBOR with another reference rate or rate structure to constitute an issuance of a new capital instrument for purposes of the capital rule. Such a replacement or amendment also would not create an incentive to redeem, as long as the replacement or amended capital instrument is not substantially different from the original instrument from an economic perspective.
• An FDIC-supervised institution that replaces or amends the terms of a capital instrument to transition from LIBOR should support its determination with an appropriate analysis that demonstrates that the replacement or amended instrument is not substantially different from the original instrument from an economic perspective. The FDIC may ask the supervised institution to provide the analysis.
• Considerations for determining that a replacement or amended capital instrument is not substantially different from the original instrument from an economic perspective could include, but are not limited to, whether the replacement or amended instrument has amended terms beyond those relevant to implementing the new reference rate or rate structure.

For information about the effect of the transition to LIBOR on your financial institution, contact us. We are here to help.

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