LIBOR Transition Heats Up for Community Banks as Deadline Nears

By Chris Cole

With the London Interbank Offered Rate, or LIBOR, set to be largely discontinued in a few months, federal regulators are increasingly vocal about the need for financial institutions to be ready for the transition.

While community bankers have had several years to prepare for the transition, recent announcements have set a hard deadline of Dec. 31, 2021. In other words, community bankers should be finalizing their plans and preparing for implementation in the months ahead.

On deadline

An estimated $200 trillion in U.S. dollar-based derivatives and loans are based on LIBOR, a global benchmark interest rate that is being phased out following manipulation controversies.

The U.K. Financial Conduct Authority has said it will cease publishing LIBOR for the one-week and two-month settings immediately after Dec. 31—confirming the year-end timeline for financial institutions worldwide.

Regulatory pressure

U.S. regulators already had plans for year-end 2021, encouraging banks last fall to cease entering new USD LIBOR contracts by Dec. 31 and transition to an alternative reference rate.

New contracts entered into before Dec. 31 should use "a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR's discontinuation," according to the agencies’ joint statement.

Top regulators reinforced their push at a recent Financial Stability Oversight Council meeting. Officials such as Treasury Secretary Janet Yellen, Acting Comptroller of the Currency Michael Hsu, and Fed Vice Chairman Randal Quarles cited SOFR as a “robust” replacement rate.

While FDIC Chairman Jelena McWilliams said most FDIC-supervised institutions do not have material LIBOR exposures, Yellen emphasized that “more must be done to facilitate an orderly transition.” For instance, Yellen said, specific market segments such as business loans are "well behind where they should be at this point."

Alternative arrangements

The Federal Reserve Bank of New York has led the U.S. transition away from LIBOR with the formation of the Alternative Reference Rates Committee, or ARRC, which is charged with ensuring a successful transition to alternative reference rates.

Specifically, the ARRC—on which ICBA serves—is encouraging financial institutions to use the Secured Overnight Financing Rate. Because there is not a forward-looking SOFR term rate to replace LIBOR, the ARRC encourages market participants to transition using currently available tools.

Under recently enacted New York State law, LIBOR-based instruments governed by New York law that do not provide effective fallbacks will transition to the applicable SOFR-based rate recommended by the ARRC or another specified body.

Further, legislation pending in Congress would address LIBOR-based legacy contracts that are not governed by New York law—such as those dealing with small business loans—as well as the tax consequences of the LIBOR transition.

Meanwhile, other rates have emerged as potential alternatives, including the American Interbank Offered Rate, or AMERIBOR.

The American Financial Exchange, which launched AMERIBOR in 2015, says the rate is not a SOFR competitor, though it focuses on meeting the needs of small and midsized U.S. banks.

LIBOR resources

In a joint statement last year, regulators spotlighted risks of the LIBOR transition, including operational difficulty in quantifying exposure and inadequate risk management processes and controls to support transition.

Fortunately for institutions not yet ready for implementation, resources are available, including:

  • An Office of the Comptroller self-assessment tool to help banks assess their LIBOR transition planning.
  • ARRC information and resources, including an overview of the LIBOR-SOFR transition, a user guide, and frequently asked questions.
  • LIBOR fallback language developed by ARRC to help financial institutions ensure contracts account for the switch, including for syndicated loans, bilateral loans, floating rate notes, and securitizations.

Community bankers with specific questions and concerns are welcome to reach out as we work toward a seamless transition. While the switch from LIBOR is a momentous change, community banks have put in considerable work to navigate the shift.

Chris Cole is ICBA’s executive vice president and senior regulatory counsel.

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