Acting Comptroller of the Currency Michael J. Hsu emphasized that federal financial regulators mean it when they call for no new LIBOR exposure after December 31, 2021, including any "synthetic" or "zombie" LIBOR.
At an Alternative Reference Rates Committee Symposium, Mr. Hsu stressed that banks must look outside of activities that directly involve LIBOR exposure (i.e., lending, derivatives and market-making) and screen for LIBOR exposure in other contexts, such as loan participation interests or as part of an instrument held for a bank's liquidity portfolio paying LIBOR-based income. He said that the OCC expects every bank to be "executing upon a comprehensive plan to address the effects of LIBOR cessation that is tailored to the bank's particular exposure to LIBOR under its current business model, risk profile, and strategic plan."
Mr. Hsu underscored the importance of a "robust" replacement rate so as to avoid future issues with "an unreliable and untrustworthy rate." He stated that because IOSCO determined the Secured Overnight Financing Rate to be a suitable and robust rate, the OCC will focus its initial supervisory efforts on use of non-SOFR rates.
Commentary
Mr. Hsu's comments build on a recent banking regulators' statement and a speech by Randal K. Quarles of the Federal Reserve Board. Thematically, Mr. Hsu emphasizes the seriousness with which regulators are viewing LIBOR cessation and the need for financial institutions to be taking prompt responsive action.
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