The FFIEC has issued a Joint Statement on Managing the LIBOR Transition, which highlights the financial, legal, operational, and consumer protection risks that will result from the expected discontinuation of the London Interbank Offered Rate (LIBOR) for institutions with exposure to the LIBOR reference rate. Institutions with LIBOR exposure should have appropriate risk management processes in place to identify and mitigate transition risks.
The Joint Statement on Managing the LIBOR Transition can be found on the Federal Financial Institutions Examination Council’s (FFIEC) website.
Statement of Applicability to Institutions with Total Assets under $1 Billion: This Financial Institution Letter (FIL) applies to all FDIC-supervised institutions with exposure to the LIBOR reference rate.
- Institutions should identify and quantify their LIBOR exposures to effectively plan for the transition and mitigate potential financial, legal, operational, and consumer protection risks.
- Institutions with LIBOR exposure should have risk management processes commensurate with the size and complexity of the institution, its activities, and extent of exposure.
- Fallback language in financial contracts will determine how the replacement of a discontinued reference rate will be handled. Institutions with LIBOR-indexed contracts should take steps to include appropriate fallback language that considers a permanent discontinuation of the reference rate to avoid potential legal and safety and soundness risk.
- Transition plans should also address consumer protection risk, including required disclosures to consumers regarding changes in terms and advanced communication for consumers to help them understand how new reference rates would affect their payments, Annual Percentage Rate, and other terms.
- Given the significant effort involved in preparing for the transition, the supervisory focus on evaluating institutions’ preparedness for LIBOR’s discontinuation will increase during 2020 and 2021, particularly for institutions with significant LIBOR exposure or less-developed transition processes.
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