By Donielle Tigay Stutland, J.D.
The OCC, Fed, and FDIC issued a joint statement on reference rates for loans, indicating that they do not endorse a specific replacement rate for the London InterBank Offered Rate, but rather that banks may use any reference rate determined to be appropriate for a specific bank’s funding model and customer needs.
The Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation (collectively, the agencies) have issued a joint statement regarding reference rates for loans. The joint statement reiterates that the agencies are not endorsing any specific replacement rate for LIBOR, which is expected to cease after 2021, including the Secured Overnight Financing Rate (SOFR). The agencies’ statement indicates that a bank may use "any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs." However, the agencies indicate that a bank should use robust fallback language in lending contracts, which contemplates the initial reference rate being discontinued.
The joint statement notes that while the Alternative Reference Rates Committee recommends SOFR as its preferred alternative for derivative and cash transactions, the use of SOFR is voluntary. The statement indicates that examiners will not criticize banks for using a reference rate other than SOFR.
The statement encourages banks to have risk management processes, commensurate with the size and complexity of their exposures, in place in order to identify and mitigate any risks associated with the transition from LIBOR. It is appropriate for banks to select suitable replacement rates for LIBOR that are appropriate given the needs of the bank, and the needs of its customers.
The agencies encourage banks to determine appropriate reference rates for lending activities and to begin transitioning loans away from LIBOR without delay. The joint statement applies to all Federal Reserve member banks, all national banks, and all FDIC supervised financial institutions.
FFIEC Statement. The statement comes after the Federal Financial Institutions Examination Council (FFIEC) issued its Joint Statement on Managing the LIBOR Transition on July 1, 2020, which discussed the risks that are expected to result from LIBOR’s cessation and encouraged supervised institutions to plan for the transition by mitigating potential financial, legal, operational, and consumer protection risks.
Additionally, OCC Bulletin 2020-68, also issued on July 1, 2020, discussed the FFEIC joint statement on LIBOR’s cessation, and provided related risk management guidance for national banks. In its bulletin, the OCC advised all banks to identify and quantify their LIBOR exposure. At that time, the OCC also stated that it did not endorse a specific LIBOR replacement rate.
SOFR Transactions. In October 2020, both Fannie Mae and Freddie Mac competed their first transactions tied to SOFR. On Oct. 30, 2020, Fannie Mae issued the market's first-ever Multifamily and Single-Family Mortgage-Backed Securities backed by adjustable-rate mortgages referencing SOFR, and on Oct. 16, 2020, Freddie Mac completed its first single-family credit risk transfer offering indexed to SOFR, the $1.086 billion STACR REMIC 2020-DNA5 offering.
Companies: Fannie Mae; Freddie Mac
MainStory: TopStory BankingOperations FederalReserveSystem FinancialStability GovernmentSponsoredEnterprises Loans
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