(April 30, 2021) A two-page fact sheet that lays out what’s behind the demise of the London Interbank Offer Rate (LIBOR), a widely used rate used for such lending products as adjustable rate mortgages, has been published by the New York Fed’s Alternative Rate Reference Committee (ARRC). The fact sheet explains (among other things) LIBOR, the problems it poses, why it is being replaced at the start of next year, and the Fed’s favored replacement for the rate, the Secured Overnight Financing Rate (SOFR). A “part II” of the sheet, available separately (and linked to the first fact sheet) outlines how SOFR will work … Readings on inflation are likely to rise more in the coming weeks before moderating,Federal Reserve Chair Jerome H. (“Jay”) Powell said this week, adding that, ultimately, there will only be a “transitory” effect on inflation. Powell said the rise in inflation indicators will be partially due to supply bottlenecks from a rebound in spending as the economy continues to reopen. Those indicators likely will also be driven by emerging reports of a strengthening economy: Real GDP increased at a seasonally adjusted annual rate of 6.4% during the first quarter of 2021, the federal Bureau of Economic Analysis said this week. In the fourth quarter of last year, real GDP increased 4.3%.
LINK:
Background on USD LIBOR
(April 16, 2021) Samuel Schumach was tapped as deputy director for external affairs and communications at NCUA this week by agency board Chairman Todd Harper. Schumach previously served as legislative affairs officer for the Federal Aviation Administration (FAA). Before that, he was a media spokesperson for the CFPB and had also served as press secretary for the Office of Personnel Management (OPM), the White House Office of National Drug Control Policy, and for former Senate Majority Leader Harry Reid (D-Nev.) … Two in five of new hires (42.1%) in 2020 were people of color, and gender diversity among senior executives achieved parity last year for the first time, NCUA said this week in a report outlining the agency’s hiring practices. In its Office of Minority and Women Inclusion (OMWI) annual report, NCUA also said 188 federally insured credit unions submitted Voluntary Credit Union Diversity Self-Assessments in 2020, up 59.3% from the 118 submissions in 2019 … Federal legislation to mitigate risks related to legacy contracts that use LIBOR (London Interbank Offered Rate) will be needed, Federal Reserve General Counsel Mark Van Der Weide told a congressional hearing Thursday. He said such legislation would establish a uniform national framework for replacing LIBOR in legacy contracts that do not provide for an appropriate fallback rate. Additionally, he indicated, a statute could diminish the instance of lawsuits that he said are inevitable due to the phase out of the reference rate. A witness at the same hearing from the OCC made essentially the same points. LIBOR is scheduled to be phased out at the end of this year (meaning, no new loans or contracts are supposed to be written that use the rate). Additionally, existing “legacy contracts” (or those that are in force now and using the reference rate) have until June 2023 to discontinue the reference rate … An executive order directing federal financial regulators (including NCUA) and others to combat climate-related financial risks is being prepared by President Joe Biden (D), according to press reports this week. The order would be issued in conjunction with a “climate summit” set for next week in Washington. Among other things, the order will also reportedly direct the Treasury Department to assess climate risks to the financial system and report back within 180 days.
LINKS:
Samuel Schumach Named Deputy Director for External Affairs and Communications
NCUA Releases Office of Minority and Women Inclusion Annual Report to Congress
(April 9, 2021) Approximately $1.5 million in awards to support digital services and cybersecurity, mentoring of small minority depository institution (MDI) credit unions, and service to underserved communities will be available to low-income-designated credit unions during 2021, NCUA said this week. The awards are made available through the Community Development Revolving Loan Fund (CDRLF); applications are accepted from federally insured credit unions that have the agency’s “low-income” designation. Non-federally insured, state-chartered credit unions may also apply; these institutions will have to complete additional application forms and agree to be examined by the NCUA to receive the funds, the agency said … New York has adopted a law creating clarity for the issue of legacy LIBOR-based contractsthat mature after mid-2023 and do not have effective fallbacks. Most LIBOR-based contracts expire before June 2023 (and the use of the reference rate is generally prohibited after the end of this year). However, there are some legacy contracts that are set to continue past the mid-year 2023 deadline – and nearly all of those, according to the Federal Reserve Bank of New York’s Alterative Reference Rate Committee (ARRC) are written under by New York law. The new measure requires the legacy contracts to adopt an alternative rate (such as the ARRC’s Secured Overnight Financing Rate (SOFR)) – or face the contracts being declared void.
LINKS:
Community Development Revolving Loan Fund Access for Credit Unions (Federal Register)
ARRC Endorses Decision to Sign New York State LIBOR Legislation into Law
(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.
(Feb. 12, 2021) Congratulations to the Massachusetts Division of Banks (credit union supervision) on being reaccredited by NASCUS. Established in 1989, the NASCUS Accreditation Program administers and assures quality standards of states’ credit union examination and supervision by applying national standards of performance to a state’s credit union regulatory program. More than 85% of all state-chartered credit union assets are supervised by NASCUS-accredited state agencies … A self-assessment tool banks can use to evaluate their preparedness for the expected cessation at year’s end of the London Interbank Offered Rate (LIBOR) as a reference rate for products and services was released this week by the Office of the Comptroller of the Currency (OCC). The agency, in Bulletin 2021-7, said the tool can be used to assess the appropriateness of the bank’s LIBOR transition plan, bank management’s execution of the plan, and related oversight and reporting … Here’s to a happy (and safe) President’s Day holiday on Monday; NASCUS’ offices will be closed in observance of the holiday.
LINK:
(Dec. 4, 2020) Banks, “as soon as practicable,” should cease entering into new contracts that employ LIBOR as a reference rate in loan contracts, the three federal banking agencies said this week. LIBOR (London Interbank Offer Rate), which is being phased out because the transactions it is based on don’t occur as often as they did in prior years, is used by many banks (and credit unions) as a benchmark for such products as adjustable mortgage loans. The agencies’ recommendation is being made, they said, in order to facilitate an orderly – and safe and sound – transition to alternative reference rates. Meanwhile, the administrator of the soon-to-be-defunct LIBOR (Intercontinental Exchange (ICE)) also this week proposed a plan to cease publishing the U.S. dollars version of the rate at the end of next year.
LINK:
Statement on LIBOR Transition Nov. 30, 2020
The forward motion to officially sideline LIBOR (London Interbank Offering Rate) as a reference rate for such financial products as adjustable mortgages and others continued this week with two top players in the mortgage market taking action.
Banking behemoth JP Morgan Chase unveiled a mortgage based on the new (and Federal Reserve-backed) Secured Overnight Financing Rate (SOFR), an alternative to LIBOR which is scheduled to be completely phased out by the end of next year. Meanwhile, secondary mortgage market giant Fannie Mae issued its first security backed by adjustable rate mortgages that use SOFR as a reference.
Also last week, the Financial Stability Board (FSB, an international group of central bankers and national regulators, which is chaired by Federal Reserve Board Vice Chair for Supervision Randal Quarles) unveiled a “global transition roadmap,” which sets out a timetable for a smooth transition away from LIBOR by year-end 2021. The FSB said the roadmap is intended to inform those with exposure to LIBOR benchmarks of steps they should take now through year-end 2021 to successfully mitigate these risks. “These are considered prudent steps to take to ensure an orderly transition by end-2021 and are intended to supplement existing timelines/milestones from industry working groups and regulators,” the group said.
Clearinghouses this month (and as recently as last week) have already begun making the switch from LIBOR to SOFR or other alternative rates, largely because of the impact on banks trading U.S. derivatives. The change affects trillions of dollars’ worth of transactions.
Last month, the Treasury’s Office of Financial Research (OFR) announced a new data tool focusing on repo data. According to OFR, the collection of repo data is expected to provide “a permanent and expanded source of data to support SOFR and reference rate transition.”
LINKS:
OFR Begins Publishing Repo Data, Unveils Short-term Funding Monitor