On Monday, the FRB, FDIC, and OCC issued a “Statement on LIBOR Transition” that encourages banks to transition away from the London Inter-Bank Offered Rate (LIBOR) as soon as possible, and in any event by December 31, 2021.    

The agencies indicate that the LIBOR administrator has announced it will consult on its intention to cease publication of the one week and two month U.S. Dollar (USD) LIBOR settings immediately following LIBOR publication on December 31, 2021, and the remaining LIBOR settings immediately following the LIBOR publication on June 30, 2023.

Banks are advised that new contracts entered into before December 31, 2021 should either use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.  The agencies warn that the failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks’ safety and soundness by creating consumer protection, litigation, and reputational risks.  In light of such risks, the agencies also warn that they will consider a bank as having created safety and soundness risks by entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021 and “will examine bank practices accordingly.”  (The agencies note that if the LIBOR administrator extends the publication of USD LIBOR beyond December 31, 2021, there may be limited circumstances in which it is appropriate for a bank to enter into new USD LIBOR contracts after December 31, 2021.)

Last month, the agencies issued a statement indicating that they were not endorsing a specific replacement rate for LIBOR for loans and advising banks that they could use any replacement rate that the bank determines to be appropriate for its funding model and customer needs.