Regulators see "actual progress" on the Libor shift because the deadline approaches

Although the transition was slow just a few months ago, the banking industry is now making rapid strides in ending its use of the scandal-ridden London interbank rate, regulators said on Friday.

With an important year-end deadline looming, banks told the Federal Reserve that much of their new business loans did not use Libor in the fourth quarter, a senior Fed official said.

"The transition away from Libor is progressing and accelerating, and it is making our financial system more stable," said Michael Gibson, who heads the Fed's oversight and regulation department, at a meeting of the Financial Stability Oversight Council.

"We are seeing real progress in moving away from the Libor, which we must see at this point, as the supervisory guidelines naturally say 'no new Libor' after December 31," said Fed Chairman Jerome Powell on Friday.

Andrew Harrer / Bloomberg

Banks are expected to stop issuing new Libor loans after December 31, as part of a global shift following an interest rate manipulation scandal several years ago.

But as recently as October, US banks made little progress in using Libor alternatives for their loans. The Fed had advised banks to accelerate the transition or to expect regulatory consequences.

Although old contracts can still refer to the Libor until mid-2023, the supervisory authorities have emphasized that banks should not issue new Libor loans after 2021, as this would create security and solidity risks.

"We are seeing real progress in moving away from Libor, which we need to see at this point, as the supervisory guidance will of course say 'no new Libor' after December 31," said Fed Chairman Jerome Powell at the meeting on Friday.

Federal Deposit Insurance Corp. Chair Jelena McWilliams said the FDIC-regulated banks continue to "go in the right direction" in the transition. Many FDIC regulated banks, especially smaller community banks, have never been heavy users of the Libor, she noted.

As banks start making more non-Libor loans, they mostly use the Secured Overnight Financing Rate, or SOFR, according to Gibson. The Alternative Reference Rates Committee, a group of market participants convened by the Fed, introduced SOFR in 2017 as a replacement for the Libor.

Some midsize and regional banks have chosen a benchmark called Ameribor because it better reflects their funding costs. Bloomberg's Short Term Bank Yield Index [BSBY] is another Libor alternative that some regional and large banks have offered their customers.

Banking regulators have stated that banks are free to choose a replacement benchmark that suits their needs as long as they exercise reasonable due diligence in assessing their potential vulnerabilities.

At the FSOC meeting too, the supervisory authorities voted to set up a new climate-related financial risk committee. The FSOC committee will consist of officials from several regulators who will work together on data and initiatives on the risks of climate change to the financial system.

The establishment of the committee was one of the recommendations in a 133-page report on climate risks published by the FSOC in October. Treasury Secretary Janet Yellen, chair of the council, said the committee would help the agencies work together to address the "pressing priority" of climate-related risks.

The council's annual report on risks to the financial system, released on Friday, identified stablecoins as "an important potential new security vulnerability" and said the FSOC stands ready to take action if necessary.

Federal regulators have raised concerns about stablecoins, which are cryptocurrencies pegged to currencies such as the U.S. dollar, and called on Congress to pass laws that strengthen the regulatory framework for the sector.

Regulators have also outlined possible steps they could take if Congress fails to act. One such step would be for the FSOC to classify certain stablecoin agreements as systemically important and subject them to new rules.

The report did not provide detailed information on the FSOC's plans on the matter, but said the council was "ready to consider the steps at its disposal" if lawmakers fail to pass comprehensive law on stablecoins.

"Although stablecoins are marketed with claims that they will retain stable value, they can be subject to widespread redemptions and liquidations of assets if investors doubt the credibility of that claim," the council said in the report.

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