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Client Alert: FFIEC Highlights LIBOR Transition Risks

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Is Your Bank Ready?

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LIBOR Phase-Out

The Federal Financial Institutions Examination Council (“FFIEC”) recently highlighted the risks of the expected phase-out of the London Interbank Offered Rate (“LIBOR”). LIBOR has long served as an international reference rate for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages and consumer loans. It is expected that a number of banks currently reporting information used to determine LIBOR may stop doing so after 2021, when their current reporting commitment ends. That could either cause LIBOR to stop publication immediately or cause the Financial Conduct Authority, LIBOR’s regulator, to determine that its quality has degraded to the degree that it no longer represents its underlying market. This is especially important because many loans are being amended, deferred, and/or extended given the current COVID-19 (coronavirus) pandemic, as well as the proposed use of LIBOR in COVID-19 government lending programs, such as the Main Street Lending Program. Based on these changes, it is important to focus on what your bank will do regarding LIBOR in the future.

Accordingly, banks should review their loans that utilize LIBOR and prepare for an appropriate transition to a substitute rate.

FFIEC Identified Risks

The FFIEC statement urges banks to plan carefully to avoid both financial losses and consumer harm. The statement highlights potential risks of the LIBOR transition, including:

Managing the LIBOR Transition

If you haven’t already done so, it is critical to prepare for the LIBOR transition and to take proactive measures, including the following:

We Can Help You

Our Financial Institutions Group is closely following the anticipated LIBOR transition and is currently counseling our banking clients on the possible alternatives, including SOFR. Additionally, we have been advising clients on potential weaknesses in LIBOR transition planning. Please call us if you have any questions or if we can otherwise be of assistance.

COVID-19 Resources

We recommend you evaluate the following pandemic-related business and legal considerations that we have been discussing with our clients:

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