Independent Banker - June 2020 - 22

PORTFOLIO
they " do not have large holdings of government securities
and therefore can only borrow on an unsecured basis. That
presents an immediate asset-liability imbalance and potentially
creates distortions in times of financial stress. "
That means that when there's a financial crisis, the
authors wrote, " overnight liquidity becomes a priority and
the value of collateral would rise, leading to increased borrowing
costs for banks irrespective of their asset size and
6 steps for transitioning from LIBOR
The shift from the London Interbank Offered Rate
(LIBOR) to a new index or method will take careful
examination of a bank's loans, systems and more.
According to information services and solutions
provider Wolters Kluwer, here are some of the steps
community banks should take:
1. Establish a project team, including legal and
compliance staff, to prepare for the shift.
2. Identify the bank's products, risk models,
systems and documentation currently using LIBOR.
3. For legacy loans that have not reached their
end date:
Q Collect and review fallback language and
determine how far back will be necessary.
This will depend on the remaining term on
legacy contracts.
Q Decide which index and
margin to use. Consider
whether different
approaches are needed
based on fallback language
variation across products.
Q Decide whether to seek amendments
through agreement from borrowers.
Q Consider ways to reduce litigation risks.
Q Based on the approach taken with legacy
loans, plan to adjust financials accordingly.
4. For loans executed in the future:
Q Decide which index and margin to use.
Q Decide whether to adopt the fallback
language recommended by the Alternative
Reference Rates Committee.
5. Plan for communications internally and to
borrowers, such as educational, potential contract
amendments and notification of an index change.
6. Prepare to report to regulators on LIBOR
transition preparedness.
affecting credit availability. "
While the 10 banks that submitted the letter are larger
than the average community bank, the collateral issue they
raise would also affect smaller banks, Hauck says. " This is
one reason why moving to SOFR is not a slam dunk and
is why the smaller banks are waiting to see how this process
plays out and are not in a hurry to implement a plan in
2020, " he adds.
Heine applauded the 10 banks' request to discuss this
challenge with regulators, so that the benchmark options
and the impacts on the industry can be more thoroughly
vetted. She advises smaller banks to consider participating
in the Federal Reserve Board's weekly conference calls,
where David Bowman, the board's senior advisor, answers
questions submitted in advance about the LIBOR transition.
" These challenges all the more argue for examining
your own bank's practices and needs to determine a plan for
effectively transitioning away from LIBOR, " she says.
Anna Kooi, national financial services practice leader in
the Chicago office of Wipfli LLP, says many CPA and consulting
firms' community bank clients are sharing that
SOFR doesn't work for them and that they're looking to
alternatives. Like the aforementioned 10 banks, community
banks typically do not have large holdings of government
securities and borrow on an unsecured basis. Consequently,
moving to SOFR could cause asset-liability imbalance.
" Since the larger banks haven't fully disclosed or
determined their direction on this, I believe community
banks will definitely be followers, " Kooi says. " So at this
point, they are keeping watchful eyes and ears to see what
they can learn. "
What to do now
In the meantime, Kooi advises that community banks
should identify all LIBOR-based credits and amend their
loan documents so that references to LIBOR are removed
and replaced with language concerning an alternate index.
Such language can be more general, as opposed to specifically
mentioning an alternative if the bank still hasn't
determined what that would be.
Community banks should stay informed on changes and
indexes being discussed by big banks. They should also keep
open communications with any relationships they may have
at larger banks, Kooi says.
" Other than getting their loan documents modified or
identifying those loan agreements, which will create a problem
when LIBOR is no longer the index, " she says, " patience
may be the order of the day. "
Katie Kuehner-Hebert is a writer in California.
22 Q ICBA Independent Banker Q June 2020
Independent Banker - June 2020

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