CCO Releases Self-Assessment Tool to Help Institutions Prepare for LIBOR Shutdown
On February 10, 2021, the Office of the Comptroller of the Currency (OCC) released OCC Bulletin 2021-7, which provides a self-assessment tool to help national banks, federal savings associations, and federal branches and agencies of foreign banking organizations assess their readiness for the planned termination of the London Interbank Rate (LIBOR).
Cessation of LIBOR
LIBOR is a benchmark rate commonly used in transactions involving loans and derivatives made by financial institutions and other sophisticated market participants. It is being phased out and replaced by risk-free rates (for example, the guaranteed overnight rate) globally. On December 31, 2021, banks are expected to stop entering into contracts using LIBOR as the benchmark rate.(1)
The transition away from LIBOR has been an operational and legal hurdle for the industry. Different levels of effort are required, depending on the size and scope of activities undertaken by market players. The OCC bulletin notes the following:
There is a risk of market disruption, litigation and destabilized balance sheets if acceptable replacement rates do not generate sufficient market acceptance or if contracts cannot move smoothly to new rates.
The OCC Self-Assessment Tool aims to help the bank’s management staff assess an institution’s progress with regard to the LIBOR transition. It’s a checklist that focuses on four areas:
- exposure assessment and planning;
- replacement rate;
- backup language; and
- progress and monitoring.
Not all sections and questions will apply to all banks. According to the OCC, the answers will depend on the size and scope of an institution’s activities. It is perhaps not surprising that the OCC also recognizes that large or complex banks and those with significant LIBOR exposures should have a “robust and well-developed transition process” in place, while larger banks. small or non-complex and those with limited LIBOR exposures may be incurred. in “less extensive and less formal transition efforts”.
The OCC advises that by 2021, LIBOR-related assessments and plans should be “at least near completion with appropriate management oversight and reporting in place” and that “most banks should strive to resolve. replacement rate issues while communicating with affected customers and third parties. “.
The self-assessment tool is aimed at the bank’s management staff by:
- national banks;
- federal savings associations; and
- branches and federal agencies of foreign banking organizations.
The report card does not indicate that institutions must report their responses to the self-assessment tool to the OCC or that a self-assessment should be completed at all. However, institutions should view the tool as an analytical framework to assess their readiness for the LIBOR transition. Responses from institutions will help them respond to any more formal inquiries, including from examiners.