October 04, 2019

Fed's Quarles: LIBOR transition poses stability risks

MoneyAs the London Interbank Offered Rate (LIBOR) is set to stop publishing after 2021, Federal Reserve Vice Chair for Supervision and Chair of the Financial Stability Board Randal Quarles is warning that the transition away from the rate could pose financial stability risks.

Quarles, speaking at the European Banking Summit, said he was concerned about institutions preparing to transition at different speeds. Similar concerns have also been expressed by other members of the Federal Reserve system.

The Alternative Reference Rate Committee, under the direction of the Federal Reserve Bank of New York, identified the Secured Overnight Financing Rate (SOFR) as the alternative to LIBOR. SOFR began publishing in 2018 and Quarles provided insights into the transition earlier this year, noting that it "should begin happening in earnest" to effectively manage risk.

Last week, members of a House Financial Services subcommittee brought up a number of LIBOR concerns during a hearing on financial stability, including whether small institutions are prepared for the transition and contractual risk.

The Federal Home Loan Banks (FHLBs) have already begun issuing SOFR-linked securities and were instructed last week by the Federal Housing Finance Agency to soon stop investing in and entering into LIBOR-tied transactions.

NAFCU Chief Economist and Vice President of Research Curt Long – in the newest edition of The NAFCU Journal – wrote an article focused on what credit unions should know about the LIBOR transition, including the adoption of the SOFR.

NAFCU will continue to keep credit unions updated on the issue and informed of resources to help with the transition.