With the anticipated shift away from adjustable-rate financial instruments referenced by the London Interbank Offered Rate, ICBA is recommending that all community banks begin to inventory their exposure to LIBOR-based assets and liabilities and the associated fallback language contained in the legal contracts.
ICBA encourages community banks to:
- prepare inventories of the vital components of their contracts, including contingent funding provisions,
- understand how the underlying reference rate will be determined if the index is no longer published or can no longer be relied upon to set the instrument’s coupon or payment factor, and
- have candid conversations with their safety and soundness examination teams about which exposures are material to the institution and how any risks would be managed.
The Federal Housing Finance Agency in September instructed all 11 Federal Home Loan Banks to stop purchasing certain assets tied to LIBOR after Dec. 31. The agency also has instructed the FHLBanks to stop entering into LIBOR-based transactions involving advances, debt, derivatives, or other products with certain maturities.