Libor Self-Assessment

OMB 1557-0349

OMB 1557-0349

The expected cessation of the London InterBank Offered Rate (Libor) by the end of 2021 prompted the OCC to create a self-assessment tool that banks may use in preparing for the expected Libor cessation. The self-assessment tool may be used when a bank is assessing the appropriateness of its Libor transition plan, execution of the plan by its management, and related matters. The Intercontinental Exchange Libor is a reference rate that is intended to reflect the cost of unsecured interbank borrowing. Libor is published daily in five currencies with seven maturities ranging from overnight to 12 months. It is used globally in the over-the-counter derivatives market, bonds, loan products, and securitizations. As of the end of 2016, $199 trillion of financial instruments were exposed to U.S. dollar (USD) Libor as the primary reference rate. While reference rates have ceased to be reported in the past, the significant exposure to Libor creates the need to assess whether a bank is identifying applicable risks, preparing for the cessation, and successfully transitioning to replacement rates. Libor is referenced globally, and its cessation could affect banks of all sizes through direct or indirect exposure. There is risk of market disruptions, litigation, and destabilized balance sheets if acceptable replacement rate(s) do not attract sufficient market-wide acceptance, or if contracts cannot seamlessly transition to new rate(s). A bank’s risk exposure from expected Libor cessation depends on the bank’s specific circumstances. Many community banks may not offer products or services that use Libor. Community banks could, however, have Libor exposure in such positions as Federal Home Loan Banks (FHLB) borrowings, mortgage-backed securities, or bonds in the banks’ investment portfolios. Libor exposure can exist on or off the balance sheet, including assets, liabilities, , and asset management activities. Risk can also emanate from third-party relationships because Libor is often used in pricing models, financial models, and other parts of banks’ infrastructure, such as core processing. The ubiquity of LIBOR, present in over $200T notional contracts, makes moving off the rate incredibly complicated. Many existing contracts do not include sufficient provisions in the event that Libor becomes unavailable (known as fallback provisions). Without preparation, Libor cessation could cause market disruption and present risks to banks and their customers. In addition, the fallback language does not sufficiently account for a permanent cessation of LIBOR. The banking agencies published a statement dictating that banks should discontinue making LIBOR exposure by the end of 2021, but as soon as practicable (with a few exceptions for orderly market support). Given that we expect banks to discontinue making LIBOR loans by this year end, the prevalence of LIBOR and the remaining work to be done within the timeframe described above, the OCC is requesting emergency clearance for this self-assessment tool to be made available to banks due to the immediate need and the brief duration of use, to help banks prepare for Libor related risk.

The latest form for Libor Self-Assessment expires 2021-07-31 and can be found here.

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