Letters: stop using LIBOR ASAP

(May 21, 2021) Stopping the use of LIBOR as a reference rate as soon as possible as a year-end expiration date looms is encouraged for all federally insured credit unions, NCUA said in letters released this week.

In the first (a Letter to Credit Unions (LTCU)), the agency said failure by credit unions to prepare for disruptions of the London Interbank Offered Rate (LIBOR) “could undermine a federally insured credit union’s financial stability, and safety and soundness.” LIBOR is a reference rate used by many financial institutions – including credit unions – to set rates on such financial products as adjustable mortgages and student loans (which NCUA said “make up a significant portion of LIBOR-indexed loans owned by credit unions.”) The rate is scheduled to be phased out at the end of this year (legacy contracts using the rate are scheduled to stop using the rate by mid-2023) because assumptions it uses have become unreliable in reflecting current economic and financial conditions.

The LIBOR transition is a significant event that credit unions should manage carefully,” the LTCU, signed by Board Chairman Harper, states. It notes that the FFIEC has issued a statement which recommends that new financial contracts use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.

Harper said the second letter released Monday by the agency, a “Supervisory Letter” (SL No. 21-01 – the first of the year), “provides the supervision framework examiners will use to evaluate a credit union’s risk management processes and planning regarding the transition from LIBOR.” The guidance in that letter, Harper stated, applies to all federally insured credit unions.

The supervisory letter outlines the background, potential LIBOR exposure for credit unions, and examination considerations – but offers no endorsement of a specific replacement for USD LIBOR. (That includes use of the Federal Reserve-developed Secured Overnight Financing Rate (SOFR), which was created specifically as a replacement for LIBOR.)

A credit union may use a reference rate for its loans and member shares that it determines is appropriate for its risk management and member needs,” the supervisory letter states. “All LIBOR-based contracts that mature after December 31, 2021 (one-week and two-month) and June 30, 2023 (one-, three-, six- and 12-month) should include contractual language that provides for use of a robust fallback rate.”

NCUA Letter to Credit Unions 21-CU-03: LIBOR transition

NCUA SL No. 21-01: Evaluating LIBOR Transition Plans