In a joint statement on managing the LIBOR transition, members of the Federal Financial Institutions Examination Council (FFIEC) highlighted the risks that will result from the transition away from LIBOR and encouraged supervised institutions to continue their efforts to transition to alternative reference rates in order to mitigate financial, legal, operational and consumer protection risks.
The financial services industry uses LIBOR as a reference rate for many financial products and instruments that include loans, investments and deposits to a range of customers, as well as borrowings and derivatives. While some smaller and less complex institutions may have limited exposure to LIBOR-denominated instruments, the transition to alternative reference rates will affect almost every institution.
The statement from the FFIEC also highlights the legal and consumer compliance risks associated with inadequate fallback language when the contractual language does not contemplate LIBOR’s permanent discontinuance. Institutions should take steps to identify and address existing contracts with inadequate fallback language to mitigate potential legal risk as well as safety and soundness risk.
Financial 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 exposure and third-party servicer arrangements. The statement from the FFIEC identifies areas where supervisory staff will focus their reviews of LIBOR transition planning and risk mitigation efforts at regulated institutions.
