Agencies: Banks must prepare for switch from Libor by Dec. 31, 2021

By Devika Patel

Knoxville, Tenn., Nov. 30 – The Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency issued a statement encouraging banks to cease entering into new contracts that use Libor as a reference rate as soon as possible and by Dec. 31, 2021 by the latest, in order to facilitate an orderly Libor transition.

“The Libor transition is a significant event that poses complex challenges for banks and the financial system,” the statement read.

“The agencies encourage banks to cease entering into new contracts that use USD Libor as a reference rate as soon as practicable and in any event by Dec. 31, 2021, in order to facilitate an orderly — and safe and sound — Libor transition.

“This statement should not be read as announcing that the Libor benchmark has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative for the purposes of language adopted by the International Swaps and Derivatives Association,” the statement concluded.

According to the statement, “new financial contracts should either utilize a reference rate other than Libor or have robust fallback language that includes a clearly defined alternative reference rate after Libor’s discontinuation.

“A bank may use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs.

“The administrator of Libor has announced it will consult on its intention to cease the publication of the one week and two month USD Libor settings immediately following the Libor publication on Dec. 31, 2021, and the remaining USD Libor settings immediately following the Libor publication on June 30, 2023.

“Extending the publication of certain USD Libor tenors until June 30, 2023 would allow most legacy USD Libor contracts to mature before Libor experiences disruptions,” the statement read.

The agencies said in the statement that banks were risking their financial stability, safety and soundness if they failed to prepare for the Libor transition.

“Failure to prepare for disruptions to USD Libor, including operating with insufficiently robust fallback language, could undermine financial stability and banks’ safety and soundness,” the agencies warned in the statement.

“The agencies believe entering into new contracts that use USD Libor as a reference rate after December 31, 2021, would create safety and soundness risks and will examine bank practices accordingly,” the statement said.

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