New York State’s financial regulator is stepping up the pressure on banks to prepare for the planned cessation of the Libor benchmark in 2021.
The New York State Department of Financial Services has given regulated institutions until Feb. 7 to show they have plans to address the cessation of the interest rate benchmark and manage the risks of transitioning to an alternative reference rate.
“Inadequate preparation for transition to alternative rates could have an adverse impact on the safety and soundness of regulated institutions and may cause harm to consumers and markets,” DFS Superintendent Linda Lacewell warned in a letter to banks.
The regulator echoed the concerns of the Financial Stability Board — an international group of central bankers and financial regulators — which said last month that market participants and regulators must start getting serious about the Libor transition.
Regulators have recognized that “there is not only a sheer volume problem but that affected contracts are dispersed widely across an organization,” Mark Chorazak, a bank regulatory partner with Cadwalader, told American Banker. “There’s a recognition that an organized transition is going to take a lot of time.”
The Libor rate has been used widely since 1986, with the gross notional value of all financial products linked to U.S. dollar Libor now estimated at approximately $200 trillion. But as American Banker reports, “the interbank lending market that Libor is based on has dried up” and dozens of banks have been implicated in a rate-rigging scheme.
Lacewell said her office was seeking assurance that regulated institutions “fully understand and have assessed the risks associated with Libor cessation, have developed an appropriate plan to manage them and have initiated actions to facilitate transition.”
According to The Wall Street Journal, major banks have made progress in preparing for the transition but the switch to an alternative rate is rife with legal and operational risks for the industry.
“They need to give themselves a lot of lead time,” said Dan Stipano, former deputy chief counsel at the Office of the Comptroller of the Currency.