Fed Announces No Credit Sensitive Supplement or Add-on Rate for Commercial Lending Products

Transition from LIBOR: Credit Sensitivity Group Workshops

Overview
In support of the transition away from LIBOR by the end of 2021, after which LIBOR can no longer be guaranteed, regulators regularly hold discussions with stakeholders to understand their needs and concerns related to the LIBOR transition.

As part of that effort, the Federal Deposit Insurance Corporation, the Federal Reserve Bank of New York, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency and the U.S. Department of the Treasury met with representatives of a number of U.S. regional banks on February 25, 2020 to discuss ways to support the transition of loan products away from LIBOR, including by holding a series of working sessions. Following up on this meeting, Credit Sensitivity Group workshops have been hosted by the Federal Reserve Bank of New York to further discuss these issues.

Four workshops were held between June and August that aimed to build a shared understanding of the challenges that banks of all sizes and their borrowers may have in transitioning loan products from LIBOR. They also explored methodologies to develop a robust lending framework that considers a credit sensitive rate/spread that could be added to the Secured Overnight Financing Rate (SOFR).

Following a meeting on September 22 with representatives of a number of U.S. regional banks that participated in the Credit Sensitivity Group workshops, the U.S. Department of the Treasury, the Federal Reserve Board of Governors, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Commodity Futures Trading Commission, sent a letter to those participants. The letter noted that "the official sector does not plan to convene a group to recommend a specific credit-sensitive supplement or rate for use in commercial lending products, but we do plan to bring together workshop participants for two additional working sessions that can highlight the continued innovation in this space, including with regard to various specific credit sensitive rates, and explore solutions to implementation hurdles for commercial loans in the transition away from LIBOR. We recognize that innovation is central to the development and evolution of financial markets, and the official sector supports the continued innovation in, and development of, suitable reference rates, including those that may have credit sensitive elements." Information related to those two additional working sessions will be available on this webpage.

The Credit Sensitivity Group workshops are separate from and supportive of the work of the Alternative Reference Rates Committee (ARRC), which is a group of private-market participants convened by the Federal Reserve Board of Governors and the Federal Reserve Bank of New York to help ensure a successful transition from U.S. dollar LIBOR to its recommended alternative, SOFR. Firms should continue their preparations to transition to robust alternative reference rates and off of LIBOR.