Is Your Institution Ready for the End of LIBOR?

The London InterBank Offer Rate (LIBOR) is likely to cease being an active index by the end of 2021.

I have not seen any guidance issued by the National Credit Union Administration on this issue; however, the Office of the Comptroller of the Currency (OCC) in its most recent Semi-Annual Risk Perspective for Fall 2019 stated the cessation of LIBOR may increase operational risk and other risks at financial institutions.

The OCC recommended that financial institutions perform an accurate inventory of balance-sheet assets, liabilities, and off-balance sheet contracts that could be affected by a movement to an alternative index, including assets serviced by third party providers. This inventory would allow a financial institution to determine its potential exposure to the end of LIBOR.

Additionally, the OCC noted that the anticipated end of LIBOR poses compliance and reputation risks associated with transitioning customers to a new rate or offering new products or services that are tied to a new and untested index. The agency advised that financial institution's risk assessment "should include analysis of customer impact, repapering contracts, updating system applications, revising and testing models, and ensuring appropriate contractual fallback language and disclosures to clients."

The OCC noted that many products may be affected by the transition away from LIBOR including adjustable rate mortgages, private student loans, credit cards, reverse mortgages, and home equity lines of credit.

The OCC wrote that disclosures and communication with consumers about the end of LIBOR and the adoption of an alternative reference rate need to be easily understood. Also, financial institution should limit expected pricing issues with observable and objective rules.

In addition, management should determine whether third-party providers are on track to modify their systems.

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