Fed to Banks: Prepare for LIBOR Going Away
Federal Reserve Board ("FRB") Vice Chair for Supervision Randal Quarles urged banks to prepare for the transition away from LIBOR and described various ways in which the agency is addressing concerns raised about the transition.
In remarks prepared for the fourth Alternative Reference Rates Committee ("ARRC") roundtable, Mr. Quarles said that the FRB developed "detailed questions for supervisory review" regarding LIBOR preparedness. Additionally, the FRB is (i) working with the CFTC and prudential regulators to clarify the treatment of margin requirements for legacy derivatives instruments and (ii) developing proposed rulemaking relating to the margin rules for non-cleared swaps.
Mr. Quarles also made clear that the FRB's supervisory stress tests would not penalize banks transitioning from LIBOR to SOFR. Mr. Quarles emphasized that lending at SOFR instead of LIBOR will not lead to a lower projection of net interest income under stress in the FRB stress-test calculations.
Additionally, Mr. Quarles warned FRB-supervised banks that the agency expects them to increase their level of preparedness as 2022 draws closer.
Commentary
Vice Chair Quarles' remarks are the latest warning for banks to prepare for the transition away from LIBOR. Banks will understandably approach the transition in different ways, but getting started now would be, according to Mr. Quarles, "consistent with prudent risk management and the duty that [banks] owe to [their] shareholders and clients."
By now, banks should be considering the transition. It's better to ponder these questions now than in the fog of a supervisory exam or earnings call.