The federal banking agencies have indicated that they will ramp up their supervisory focus on banks’ transitions away from the London Interbank Offered Rate (LIBOR) in 2020 and 2021. The agencies noted that as part of examination activities, “supervisory staff will ask institutions about their planning for the LIBOR transition including the identification of exposures, efforts to include fallback language or use alternative reference rates in new contracts, operational preparedness, and consumer protection considerations.” The agencies also noted that supervisory focus will be tailored to the size and complexity of each institution’s LIBOR exposures.
Institutions should consider safety and soundness standards and consumer protection laws as they plan for and address risks that will arise with the transition from LIBOR, which is not guaranteed to be sustained beyond 2021.
To prepare for the transition, the agencies recommend that institutions take steps including:
• identifying and quantifying LIBOR exposure across product categories and lines of business;
• conducting a risk assessment of LIBOR exposures, which may include scenario testing, legal review and other analysis;
• creating transition plans with milestones and key completion dates;
• conducting an assessment by bank management of revisions that may be necessary to update the institution’s policies, processes and internal control systems;
• assigning responsibility for LIBOR transition oversight to a committee, team or officer; and
• reporting progress on the LIBOR transition to the institution's board of directors and senior management team.
All institutions should have risk management processes in place to identify and mitigate their LIBOR transition risks that are commensurate with the size and complexity of their exposures. Supervisory focus will be tailored to the size and complexity of these institution’s LIBOR exposures. Large or complex institutions and to those with material LIBOR exposures should have a robust, well–developed transition process in place. In contrast, for smaller institutions and those with limited exposure to LIBOR–indexed instruments, less extensive and less formal transition efforts may be appropriate. By taking steps to identify and mitigate risks early, institutions will be better prepared to address potential risks that may arise from the LIBOR transition.