LIBOR Phaseout: An Update
First announced in 2017, the phaseout of LIBOR (London Interbank Offered Rate) as a global interest rate benchmark for interbank lending will be completed by the end of 2021. In addition, many banks also use LIBOR as a reference rate for adjustable rate commercial and consumer loans. The United States Federal Reserve has recommended SOFR (Secured Overnight Financing Rate) as a replacement.
Transition Planning Underway
Credit executives should be determining the scope of any impacts and developing a timetable for the phaseout at their institutions. Financial regulators have made it clear that banks need a LIBOR transition plan now. For example, the New York State Department of Financial Services (NYDFS) is requiring all institutions it supervises to submit a written plan describing the institution’s plan to address its LIBOR cessation and transition risk. The due date for this plan was recently extended to March 23, 2020.
Required Cessation Plan
As outlined by the NYDFS, each LIBOR cessation plan should describe:
- Programs that would identify, measure, monitor, and manage all financial and non-financial risks of transition
- Processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates, for both the institution and its customers and counterparties
- Processes for communications with customers and counterparties
- A process and plan for operational readiness, including related accounting, tax, and reporting aspects of such a transition
- The governance framework, including oversight by the board of directors or the equivalent governing authority, of the regulated institutions
Regardless of the appropriate regulators, any financial institution in the United States with existing LIBOR exposure should be aware that federal banking regulators, including the OCC, have determined that the LIBOR phaseout poses compliance and reputational risks. The transition will be a topic of inquiry during their supervisory exams for at least the next two to three years.
All commercial or consumer loan customers with adjustable rates based on LIBOR will be impacted. While different customer segments may be impacted differently depending on the types of loans they have and the terms of their loans, at minimum many LIBOR customers will need to receive change in terms notices.
The phaseout of LIBOR creates a complex communications challenge. Once the actual transition plan is determined, you’ll need to define the audiences, timing and required disclosures, and tactical solutions. At MKP, we believe every customer touchpoint is an opportunity to deepen client relationships. That’s why you should consider partnering with a team of experts in financial communications. MKP specializes in developing thoughtful strategies that can help make even matter-of-fact change communications into ones that support your brand and reinforce customer loyalty.
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