The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (collectively, the “Banking Agencies”) issued a statement (“Statement”) on November 6, 2020, regarding the upcoming discontinuation of LIBOR as a reference rate.
Referencing a recent statement on the LIBOR transition issued by the Federal Financial Institutions Examination Council, the Banking Agencies remind banking organizations that new contracts should either contain a new reference rate other than LIBOR or contain fallback language that includes a clearly defined reference rate for use after LIBOR is discontinued
The Statement make clear that the Banking Agencies are not endorsing a specific replacement rate for LIBOR. Banks already have are beginning to use other reference rates in their contracts, such as the Secured Overnight Financing Rate (“SOFR”) developed by the Alternative Reference Rates Committee (ARRC”). However, the use of SOFR still is voluntary.
The Banking Agencies acknowledge that funding models differ among banks and it is appropriate for banks to choose their own replacement rate that is suitable for their needs. For example, some banks have advocated for a more credit-sensitive reference rate because SOFR is near risk free and that use of a credit-sensitive rate as an additional replacement reference rate for LIBOR better might better reflect banks’ funding costs in certain transactions.
The Banking Agencies remind market participants that use of a robust fallback language provision in their loans is critical to protect banks and customers from a potential disruption of reference rates. They also stress the importance of having risk management processes in place for the LIBOR transition.
In other developments, the ARRC recently issued a memorandum to the Banking Agencies regarding the effect of the LIBOR transition on banks’ regulatory capital and liquidity requirements.
Norton Rose Fulbright has assembled a group of its attorneys from around the globe to stay on top of these issues and assist clients in the transition to new reference rates. More information can be found here.