On February 10, 2021, the Office of the Comptroller of the Currency (“OCC”) released a self-assessment tool to assist the institutions that it regulates in preparing for the expected cessation of the London InterBank Offered Rate (“LIBOR”).[1]

Background

Over the last year, the US federal banking regulators have increasingly focused on the need for US financial institutions to transition away from LIBOR and prepare for its expected cessation. For example, in November 2020, the regulators issued a statement on their expectation that US financial institutions will cease entering into new contracts that use LIBOR as a reference rate by December 31, 2021.[2] The regulators also indicated that they would examine financial institutions to identify LIBOR-related practices that may create safety and soundness risks.

OCC Tool

For those familiar with bank examinations, the OCC’s tool is indistinguishable from the procedures used by examiners to evaluate a bank’s activities and management practices. Specifically, the OCC’s tool consists of a set of yes/no questions on a bank’s preparations for the LIBOR transition with associated comment fields. These questions are grouped into broader objectives, such as: “Does the bank have appropriate processes in place to implement Libor transition plans?”.

The OCC contemplates that banks will tailor and use the tool to assess their risk management processes and identify and mitigate LIBOR transition risk. For that reason, the questions are conceptual in nature and do not establish specific expectations (e.g., “reasonable time frames” vs. “six months”). This is similar to the approach the OCC has taken in other risk management settings (e.g., cybersecurity, third-party service providers) and reflects both the diversity of financial institutions that it regulates and the range of conduct that is safe and sound.

Takeaways

The release of the OCC’s tool is another step in the ratcheting up of supervisory focus on LIBOR transition. It operationalizes the prior statement that the regulators will examine financial institutions to identify LIBOR-related practices that may create safety and soundness risks and appears to be intended to help institutions prepare for those examinations. While the tool was released by the OCC only and its use by banks does not appear to be legally required, all US financial institutions should review it carefully as the lens that regulators will use in assessing their risk management activities.

[1] The OCC regulates national banks, federal savings associations, and federal branches and agencies of foreign banking organizations.

[2] The OCC’s statement of justification for releasing the tool is notably broader than the November 2020 guidance, and states that the regulators are “dictating that banks should discontinue making LIBOR exposure by the end of 2021, but as soon as practicable (with a few exceptions for orderly market support).” See https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202101-1557-007.