SR 21-7:
Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551
DIVISION OF
SUPERVISION AND REGULATION
March 9, 2021
TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK AND INSTITUTIONS SUPERVISED BY THE FEDERAL RESERVE
Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR
Applicability: This letter is relevant to all firms supervised by the Federal Reserve.
As a follow-up to the issuance of the Interagency Statement on LIBOR Transition1 on November 30, 2020, the Federal Reserve is issuing the attached guidance2,3 to assist examiners in assessing supervised firms’ progress in preparing for the transition. The interagency statement notes that entering into new contracts that reference LIBOR after December 31, 2021 would create safety and soundness risks; it encourages supervised firms to cease entering into such contracts as soon as practicable.4 The extension of certain LIBOR tenors until June 30, 2023 will allow some existing LIBOR exposures to mature naturally.
Examiners should review supervised firms’ planning for, and progress in, moving away from LIBOR during examinations and other supervisory activities in 2021. Supervised firms should demonstrate progress towards moving away from referencing LIBOR in new products. The attachments outline the factors that examiners should consider in assessing six key aspects of transition efforts: (1) transition planning; (2) financial exposure measurement and risk assessment; (3) operational preparedness and controls; (4) legal contract preparedness; (5) communication; and (6) oversight. Separate attachments are included for institutions with less than $100 billion in total consolidated assets (which generally have less material and less complex LIBOR exposures) and those with $100 billion or more in total consolidated assets (which generally have more significant and complex LIBOR exposures and should develop more detailed transition plans).
Supervised firms that are not making adequate progress in transitioning away from LIBOR could create safety and soundness risks for themselves and for the financial system. Accordingly, examiners should consider issuing supervisory findings and other supervisory actions if a firm is not ready to stop issuing LIBOR-based contracts by December 31, 2021.
In addition to examination work, the Federal Reserve is working with both domestic and foreign supervisors, sharing information and discussing LIBOR transition preparedness in supervisory colleges and other forums (e.g., the Financial Stability Board, the Basel Committee on Banking Supervision) as the global effort to transition away from LIBOR by December 31, 2021 continues.
Reserve Banks should distribute this letter to the supervised firms in their districts, as well as to appropriate supervisory and examination staff.
Supervised firms with specific questions concerning their examination and supervisory activities should direct these questions to their Reserve Bank point of contact or the examiner in charge. In addition, supervised firms may send questions via the Board’s public website.5
signed by
Michael S. Gibson
Director
Division of
Supervision and Regulation
Notes:
- https://www.federalreserve.gov/supervisionreg/srletters/SR2027.htm Return to text.
- Examiner Guidance for Assessing LIBOR Transition Efforts at Firms with Less Than $100 Billion in Total Consolidated Assets Supervised by the Federal Reserve Return to text.
- Examiner Guidance for Assessing LIBOR Transition Efforts at Supervised Firms with $100 Billion or More in Total Consolidated Assets Return to text.
- The Alternative Reference Rates Committee (ARRC) has published “best practices” that provide various deadlines for when firms should cease entering into contracts that reference LIBOR. For example, the ARRC “best practices” provide that no business loans using USD LIBOR and maturing after 2021 should be originated after June 30, 2021. Examiners should not rely on deadlines in the ARRC’s “best practices”, but rather focus on the ability of supervised firms to cease entering into new contracts that reference LIBOR by December 31, 2021, consistent with the Interagency Statement on LIBOR Transition. Return to text.
- See http://www.federalreserve.gov/apps/contactus/feedback.aspx. Return to text.