Agencies clarify LIBOR transition on regulatory capital instruments
On July 29, the FDIC, Federal Reserve Board, and OCC (see FDIC FIL-54-2021, Fed SR 21-12, and OCC Bulletin 2021-32) provided answers to frequently asked questions (FAQs) about the impact on regulatory capital instruments under 12 CFR 324 when transitioning from LIBOR to another reference rate. Among other things, the agencies clarified that “such a transition would not change the capital treatment of the instrument, provided the alternative rate is economically equivalent with the LIBOR-based rate.” Specifically, the FAQs clarify that the agencies do “not consider the replacement or amendment of a capital instrument that solely replaces a reference rate linked to LIBOR with another reference rate or rate structure to constitute an issuance of a new capital instrument for purposes of the capital rule.” Additionally, such a replacement or amendment would not create an incentive to redeem, provided “there are no substantial differences from the original instrument from an economic perspective.” Supervised financial institutions should conduct an appropriate analysis demonstrating that the replacement or amended instrument is not substantially different from the original instrument from an economic perspective and may be asked to provide the analysis to the agencies. “Considerations for determining that a replacement or amended capital instrument is not substantially different from the original instrument from an economic perspective could include, but are not limited to, whether the replacement or amended instrument has amended terms beyond those relevant to implementing the new reference rate or rate structure,” the FAQs state.
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