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Financial Services Law Insights and Observations

FFIEC addresses LIBOR transition

Federal Issues FFIEC LIBOR OCC Risk Management

Federal Issues

On July 1, the member agencies of the Federal Financial Institutions Examinations Council (FFIEC) issued a joint statement highlighting several risks that will result from the anticipated cessation of LIBOR at the end of 2021. Institutions with LIBOR exposures should put in place appropriate risk management processes “commensurate with the size and complexity of their exposures” to identify and mitigate financial, legal, operational, and consumer protection risks related to the transition, the FFIEC warned. Among other things, the FFIEC noted that as part of the agencies’ examination activities, “supervisory staff will ask institutions about their planning for the LIBOR transition including the identification of exposures, efforts to include fallback language or use alternative reference rates in new contracts, operational preparedness, and consumer protection considerations.” Additionally, agencies will increase their supervisory focus on evaluating institutions’ preparedness for LIBOR’s discontinuation during 2020 and 2021, “particularly for institutions with significant LIBOR exposure or less-developed transition processes.” Key recommendations include (i) identifying and quantifying LIBOR exposure across all products; (ii) discontinuing the origination or purchase of LIBOR-indexed instruments to limit exposure; (iii) creating transition plans for consumer financial products in order to develop clear, timely consumer disclosures regarding any changes in terms; and (iv) developing strategic transition plans with milestones and key completion dates addressing areas such as third-party risk management.

The OCC also issued a bulletin expanding on the joint statement and providing guidance for regulated banks.

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