Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation

Office of the Comptroller of the Currency

Statement on Reference Rates for Loans

November 6, 2020

The Board of Governors of the Federal Reserve System, the Office of the Comptroller of

the Currency, and the Federal Deposit Insurance Corporation (collectively, the agencies) are

issuing this statement to reiterate that they are not endorsing a specific replacement rate for

LIBOR for loans. A bank may use any reference rate for its loans that the bank determines to be

appropriate for its funding model and customer needs. [Footnote 1

- For purposes of this guidance, the term “bank” includes depository institutions under the Federal Deposit

Insurance Act (12 U.S.C. 1813(c)(1)), U.S. branches and agencies of foreign banks, Edge and agreement

corporations, bank holding companies, and savings and loan holding companies. End of Footnote 1.]

However, the bank should include

fallback language in its lending contracts that provides for use of a robust fallback rate if the

initial reference rate is discontinued.

Background and Discussion

As discussed in the recent FFIEC “Joint Statement on Managing the LIBOR Transition,” [Footnote 2

- https://www.ffiec.gov/press/PDF/FFIEC%20Statement%20on%20Managing%20the%20LIBOR%20Transition.pdf. End of Footnote 2.]

new contracts should either utilize a reference rate other than LIBOR or have robust fallback

language that includes a clearly defined alternative reference rate after LIBOR's discontinuation.

The Alternative Reference Rates Committee (ARRC), a group of private-market participants

convened to help ensure a successful transition from LIBOR, recommended the Secured

Overnight Financing Rate (SOFR) as its preferred alternative for both cash and derivative

transactions. [Footnote 3

- SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The

Federal Reserve Bank of New York publishes SOFR on its website each day at approximately 8:00 a.m. eastern

time. End of Footnote 3.]

The use of SOFR is voluntary. [Footnote 4

- Some banks have noted that SOFR is a near-risk-free rate and does not reflect banks' underlying funding costs.

These banks have advocated for the development of a credit-sensitive rate or a credit-sensitive spread that could

be added to SOFR to better reflect banks' funding costs. The official sector recently held a series of workshops

with banks and borrowers to discuss potential credit-sensitive alternatives to the use of SOFR for loan products.

See https://www.newyorkfed.org/newsevents/events/markets/2020/0225-2020. End of Footnote 4.]

The agencies recognize that banks' funding models differ and that in structuring their

lending activities it is appropriate for banks to select suitable replacement rates for LIBOR that

are most appropriate given their specific circumstances. This may include using credit-sensitive

alternatives to LIBOR. Banks should assess the appropriateness of alternative reference rates in

light of their funding costs and their customers' needs. Additionally, banks should include

fallback language that provides for the use of a robust fallback rate if the initial reference rate is
discontinued. Fallback language can help protect banks and their customers from disruptions in

the availability of reference rates.

All institutions should have risk management processes in place to identify and mitigate

their LIBOR transition risks that are commensurate with the size and complexity of their

exposures. Examiners will not criticize banks solely for using a reference rate, including a creditsensitive rate, other than SOFR for loans.

Prompt action encouraged

The agencies encourage banks to determine appropriate reference rates for lending

activities and begin transitioning loans away from LIBOR without delay. The agencies also

encourage banks to accelerate outreach to lending customers to ensure that they are aware of, and

prepared for, the transition from LIBOR. Finally, the agencies encourage banks to consider any 

technical changes that might be required for internal systems to accommodate new reference

rates or fallback rates.