Yesterday, July 1, the Federal Financial Institutions Examination Council released a Joint Statement on Managing the LIBOR Transition (the “Joint Statement”). The Joint Statement discusses the LIBOR replacement issues at a high level and “does not establish new guidance or regulation.” The Joint Statement does not mandate SOFR or any other rate as the replacement for LIBOR.
What the Joint Statement does do is lay out supervisory expectations for an insured depository institution’s plans for the LIBOR transition. These plans will be reviewed at the institution’s next safety and soundness examination – which may occur well before LIBOR is discontinued.
For many institutions, the critical supervisory issue is likely to be how an institution plans to implement the fallback language in existing contracts. Fallback or replacement language is typically not uniform in these contracts and may not address the permanent cessation of LIBOR. Further, according to the Joint Statement, LIBOR transition plans should include the identification of LIBOR-related exposures, efforts to include fallback language or use alternative reference rates in new contracts, operational preparedness, and consumer protection considerations.
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