Banks should stop using the London interbank offered rate for new transactions before the end of 2021, U.S. banking regulators said Monday.
"Given consumer protection, litigation and reputation risks, the agencies believe entering into new contracts that use USD LIBOR as a reference rate after Dec. 31, 2021, would create safety and soundness risks and will examine bank practices accordingly," officials from the Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said in a joint statement.
New financial contracts should either use a different reference rate "or have robust fallback language" for when LIBOR is discontinued before 2022, the regulators said.
Legacy contracts will have until June 30, 2023, to allow most of them to mature before LIBOR experiences disruptions, but the regulators warned that "failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks' safety and soundness."
Securities and Exchange Commission Chairman Jay Clayton said in a separate statement that the regulators' announcements "establish a pragmatic, market-oriented path for managing the transition away from LIBOR. We encourage registrants to proactively transition to market-based reference rates and stand ready to assist market participants."