FHFA Sends Letter to FHLBs With Warning on LIBOR Alternatives

WASHINGTON–The Federal Housing Finance Agency (FHFA) has sent a letter to the Federal Home Loan Banks cautioning that some of the alternatives being proposed for the soon-to-expire LIBOR may pose safety, soundness and reputational risks.

The letter from FHFA Deputy Director Andre D. Galeano to the presidents and CFOs of the FHLBs notes that in recent months “several organizations in the marketplace have announced or introduced other potential alternative reference rates that may be inconsistent with established principles for an acceptable reference rate.”

LIBOR, the London Interbank Offered Rate, is no longer to be offered for use with new contracts and will be phased out completely for existing contracts by June 2023.

Galeano wrote that FHLB use or adoption of the alterative rates “may significantly pose the same safety and soundness and reputational risks that befell LIBOR.”

SOFR Cited

Instead, stated Galeano, the alternative rate developed by the Federal Reserve, the Secured Overnight Financing Rate (SOFR), is “an appropriate and well-accepted replacement” for LIBOR. He pointed to the “alacrity” at which FHLB system has moved away from LIBOR to SOFR and also issued a warning.

“To this end, DBR (the FHFA Division of Bank Regulation) does not believe the (FHLB) System should experience recidivism in adopting and using alternative reference rates that have shortcomings similar to those of LIBOR and other recently discontinued or soon to be discontinued reference rates,” he wrote.