A couple frequently asked questions (FAQs) on the impact of the transition away from LIBOR (London Interbank Offered Rate) on regulatory capital instruments were issued Thursday by the federal agencies that charter banks and thrifts and insure their deposits.
The Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency (OCC), in separate issuances to supervised institutions, noted that they do not view replacing or revising a capital instrument (for example, qualifying preferred stock or subordinated debt) solely to replace a reference rate linked to LIBOR with another reference rate or rate structure as constituting an issuance of a new capital instrument under their capital rules. For purposes of the capital rule, they said, the replacement or amended instrument would retain the maturity of the original instrument.
The agencies also noted that the replacement or amendment would not create an incentive to redeem, as long as the replacement or amended capital instrument is not substantially different from the original instrument from an economic perspective. “For example, amending the credit spread solely to reflect the difference in basis between Libor and the replacement reference rate and not adjusting for changes in the credit quality of the issuer would not result in creating an incentive to redeem the capital instrument,” according to the FAQs.
The agencies said a bank making such adjustments solely to address the move way from LIBOR “should support its determination with an appropriate analysis that demonstrates that the replacement or amended instrument is not substantially different from the original instrument from an economic perspective.”