Indiana Department of Financial Institutions · IN
Advisory Letter 2019-02_ LIBOR
July 1, 2019
Summary
The Indiana Department of Financial Institutions advises state-chartered banks to prepare for the discontinuation of LIBOR after 2021. Institutions must identify LIBOR-referenced assets and contracts, ensure fallback language is in place, and work with counterparties on amendments. The ARRC recommends SOFR as an alternative, but regulators do not mandate any specific replacement rate.
DEPOSITORY DIVISION
ADVISORY LETTER 2019-02
MARCH 15, 2019
TO: Indiana State-Chartered Financial Institutions
FROM: Christopher C. Dietz, Deputy Director, Depository Institutions
RE: Sunset Date on the London Interbank Offered Rate (LIBOR)
The Indiana Department of Financial Institutions is issuing this advisory statement to spotlight the termination of the London Interbank Offered Rate (LIBOR) after 2021. The banks that serve on the panel providing the inputs to LIBOR have agreed to support the reference rate only until the end of 2021. The termination of this reference rate may impact the interest rates financial institutions charge on loans, borrowing advance rates, interest rates paid on trust preferred debt, and other debt instruments. Financial institutions should be preparing for this event well in advance of that date.
The Alternative Reference Rates Committee (ARRC) has been meeting since November 2014 to identify a set of alternative US dollar reference rates that are based on transactions from a more robust underlying market than LIBOR. In June 2017 the ARRC identified the secured overnight financing rate (SOFR), which the Federal Reserve Bank of New York publishes in cooperation with the U.S. Office of Financial Research, as the reference rate that represents best practice for use in certain new US dollar derivatives and other financial contracts. Financial institutions may select any reference rate for use, regulators are not mandating the use of SOFR or any other rate.
Participants in many cash markets using LIBOR as a reference rate are now actively seeking to mitigate their risks both by seeking more robust contract language and considering transitioning away from LIBOR to a new reference rate.
Financial institutions are encouraged to begin taking risk management actions now to manage the transition from LIBOR:
- Identify all on-balance sheet and off-balance sheet references to LIBOR.
- Determine which items will continue to exist beyond 2021 and ensure that their documentation includes appropriate fallback language for when LIBOR no longer exists.
- Work with counterparties to amend the necessary documentation.
- Develop disclosures for affected customers
To date the federal regulatory agencies have not issued supervisory guidance on this topic. The web site of the ARRC (www.newyorkfed.org/arrc) is an excellent source of the latest information on developments. The FFIEC hosted an industry webinar in December that provides background information. The archived presentation can be viewed by registering at https://www.webcaster4.com/Webcast/Page/583/28297.
If you have any questions on the above advisory statement please contact Christopher Dietz at cdietz@dfi.in.gov or 317-617-8440.
Source: https://www.in.gov/dfi/files/Advisory-Letter-2019-02_-LIBOR.pdf
Common questions
- What does "Advisory Letter 2019-02_ LIBOR" cover?
- The Indiana Department of Financial Institutions advises state-chartered banks to prepare for the discontinuation of LIBOR after 2021. Institutions must…
- Which agency issued this update?
- This update was issued by Indiana Department of Financial Institutions.
- When was it published?
- It was published on July 1, 2019.