FRB Vice President Warns Against ‘Intensified’ Regulatory Focus on LIBOR Institutional Planning – Finance and Banking

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United States: FRB Vice President Warns Against ‘Intensified’ Regulatory Focus on LIBOR Institutional Planning

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In remarks at the Structured Finance Association conference, Federal Reserve (“FRB”) vice chairman of oversight Randal K. Quarles warned the FRB would be stepping up its focus on transition planning financial institutions in the run-up to LIBOR termination.

Mr Quarles said using LIBOR after 2021 “would present security and soundness risks”. He described recent supervisory efforts by banking regulators, in particular the November 2020 letter, urging banks “to drop US dollar (USD) LIBOR as soon as possible.” He said the FRB is working with other regulators to provide further guidance on what qualifies as a “new” use, but suggested that this “would include any agreement creating additional exposure to LIBOR for a supervised institution or extending the term. term of an existing LIBOR contract. “

Mr Quarles also noted that data for the second quarter of 2021 shows that large companies used alternative rates for less than one percent of variable rate business loans and eight percent of derivatives. He said that “lenders will need to step up the pace, and our examiners expect supervised institutions to step up their use of alternative rates.” He also said, in response to requests for more time to assess alternative tariffs that, “[t]time is running out, and banks won’t find LIBOR available after the end of the year, no matter how unhappy they may be with their options to replace it. “

Regarding alternative rates, Mr. Quarles reiterated that banks can use the Guaranteed Overnight Funding Rate (“SOFR”) or any other alternative rate that the bank deems appropriate for its funding model and needs. of its customers. He added that banks using non-SOFR rates should ensure that they (i) are aware of the rate construction and any associated “weaknesses” and (ii) use strong fallback provisions.

Remark

Vice President Quarles began this speech by establishing his literary bona fides, Kant, Wodehouse, Eliot, and Didion (including using a quote from the latter to sneak into a not-so-subtle dig at the conference venue – Las Vegas). While market participants may disagree with his choice of recreational reading, all of the following are important to LIBOR users. Mr Quarles has made it clear that the Fed is seriously considering moving away from LIBOR and expects banks to act on it.

Primary sources

  1. FRB Speech, Randal K. Quarles: Goodbye to All This – The End of LIBOR

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