‘No scenario’ for continued use of LIBOR, Fed governor asserts

(March 26, 2021) The Federal Reserve’s top supervisor this week made it clear that the future of LIBOR as a reference rate for such products as adjustable-rate mortgages will be sealed after June 2023.

In remarks this week to a symposium on reference rates sponsored by the Federal Reserve Bank of New York’s Alternative Reference Rates Committee (ARRC), Federal Reserve Board Vice Chair for Supervision Randal Quarles said recent statements about the discontinuation of the London Interbank Offer Rate (LIBOR) are definitive. “There is no scenario” in which LIBOR (London Interbank Offer Rate) will continue past mid-year 2023, when U.S. dollar (USD) LIBOR will no longer be published, Quarles said.

The group that publishes LIBOR has already announced that it can no longer guarantee the rate after the end of this year. (The June 2023 date refers to outstanding contracts that use the rate; after that date, the administrator of LIBOR – the ICW Benchmark Administration (IBA) has said it will no longer publish overnight, one-month, three-month, six-month, or one-year USD LIBOR).

Additionally, the federal banking regulators in November issued guidance to their supervised entities that, after the end of this year, “continued use of LIBOR in new contracts would create safety and soundness risks, and we will examine bank practices accordingly.” NCUA has not issued similar guidance, although it did join an FFIEC statement last summer urging financial institutions to continue their efforts to transition to alternative reference rates. In addition, the agency’s 2021 “supervisory priorities” note the agency continues to encourage credit unions to prepare for LIBOR’s demise by year’s end.

Also this week, the New York state legislature passed legislation that is aimed at minimizing legal uncertainty and adverse economic effects for LIBOR contracts, a side effect of the discontinuation of the reference rate. According to the ARRC, the legislation affects LIBOR contracts that mature after June 2023, including those that have no effective means to replace LIBOR upon its cessation. The legislation is significant to the phase-out of LIBOR since New York law governs many of the financial products and agreements referencing LIBOR, according to the ARRC.

LINK:
Federal Reserve Vice Chair for Supervision Randal K. Quarles Keynote Remarks, “The SOFR Symposium: The Final Year”