Federal Banking Agencies Issue Joint Statement Regarding LIBOR Transition

The FDIC, the OCC, and the Board of Governors of the Federal Reserve System (collectively, the Agencies) recently issued a joint statement reiterating prior guidance that 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 interagency statement notes, however, that “the bank should include fallback language in its lending contracts that provides for use of a robust fallback rate if the initial reference rate is discontinued.”

The joint statement includes the following additional key points:

• The Agencies are not endorsing a specific replacement rate for LIBOR for loans.
• Institutions should have risk management processes in place to identify and mitigate their LIBOR transition risks; these processes should be commensurate with the size and complexity of their exposures.
• Banks should select suitable replacement rates for LIBOR that are appropriate given the needs of the bank as well as its customers.
• Banks may use the Secured Overnight Financing Rate (SOFR) recommended by the Alternative Reference Rates Committee, although the use of SOFR is voluntary.
• Examiners will not criticize banks solely for using a reference rate other than SOFR for loans.
• Banks should begin to determine appropriate reference rates for lending activities and begin transitioning loans away from LIBOR without delay.