The OCC has issued a bulletin that includes a self-assessment tool for OCC-supervised banks to evaluate how prepared they are to address the risks arising from the expected cessation of the publication of the London Inter-Bank Offered Rate (LIBOR) next year.
In November 2020, the OCC, together with the FDIC and the Federal Reserve Board, issued a “Statement on LIBOR Transition” that encouraged banks to transition away from LIBOR as soon as possible, and in any event by December 31, 2021. In the statement, the agencies indicated 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. The agencies advised banks 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.
In its new bulletin, the OCC indicates that in 2021, LIBOR exposure and risk assessments and cessation preparedness plans should be at least near completion with appropriate management oversight and reporting in place. It also states that most banks should be working toward resolving replacement rate issues while communicating with affected customers and third parties, as applicable.
The assessment tool is a check list of questions divided into four sections. (The OCC notes that not all sections or questions apply to all banks.) The sections and their objectives are as follows:
- Exposure assessment and planning. The section contains questions for a bank to consider in assessing whether it (1) is managing LIBOR cessation from an appropriately detailed transition plan commensurate with the size and complexity of LIBOR exposures, and (2) has appropriate processes in place to implement LIBOR transition plans.
- Replacement rates. The section contains questions for a bank to consider in assessing whether management has planned for identified appropriate replacement rates and spread adjustment methodologies.
- Fallback language. The section contains questions for a bank to consider in assessing whether management has planned for and taken sufficient actions to ensure the appropriateness of fallback language in both existing and new contracts.
- Progress and oversight. The section contains questions for a bank to consider in assessing whether progress toward LIBOR cessation preparedness is sufficient given the size and complexity of risk exposure.