Federal financial regulators, including the NCUA, issued an interagency statement Wednesday to highlight risks resulting from the transition away from the London Inter-bank Offered Rate (LIBOR) for consumers and regulated entities. LIBOR is set to stop publishing after 2021 and the Secured Overnight Financing Rate (SOFR) has been identified as its alternative.
The statement encourages supervised institutions to continue their efforts to transition to alternative reference rates to mitigate legal, operational, and consumer protection risks.
“The financial services industry uses LIBOR as a reference rate for many financial products and instruments that include loans, investments, and deposits to a range of customers, as well as borrowings and derivatives,” wrote the regulators. “While some smaller and less complex institutions may have limited exposure to LIBOR- denominated instruments, the transition to alternative reference rates will affect almost every institution.”
In addition, the group of financial regulators, which also includes the CFPB, Board of Governors of the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), noted the legal and consumer compliance risks associated with inadequate fallback language – specifically, when the contractual language does not touch LIBOR being permanently discontinued.
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