Regulators joint statement on managing LIBOR transition

The members of the Federal Financial Institutions Examination Council (FFIEC) issued a statement yesterday highlighting 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 also highlights:

• the legal and consumer compliance risks associated with inadequate fallback language, when the contractual language does not contemplate LIBOR’s permanent discontinuance;
• the need for each financial institution to have risk management processes to identify and mitigate LIBOR transition risks that reflect the size and complexity of their exposure and third-party servicer arrangements; and
• areas where supervisory staff will focus their reviews of LIBOR transition planning and risk mitigation efforts.