09 Oct FRB – Steps to Prepare for the Cessation of LIBOR
October 9, 2020 –
Steps to Prepare
The first step is listed as understanding the current level of LIBOR exposure at the bank. Use exposure to review financial contracts to ensure the use of proper fallback language. Address operational readiness of systems and models, including third-party providers. Develop a strategy for consumer protection risks, inform customers on transition plans.
ARRC recommended a secured overnight financing rate (SOFR) as a US LIBOR alternative; however, there are other alternative rates aside from SOFR banks may wish to use. Community banks should conduct their own due diligence to select the appropriate rate. Considerations include whether the alternative rate reflects the bank’s own cost of funding, as well as whether the rate’s credit sensitivity is a important factor for the bank’s risk management.
Examiners completed a questionnaire on individual bank LIBOR transition preparedness. Results showed banks were aware of the transition and in various stages of preparations. 2/3 had not conducted legal contract reviews, only 1/3 had assessed infrastructure. 3/4 had not created a strategy to communicate with customers/clients on implications. Following the survey, the FRB is deepening supervisory engagement on LIBOR transition.
For more information, visit www.communitybankingconnections.org