Updated September 2020

AS THE INDUSTRY CONTINUES TO MOVE toward the potential end of LIBOR, FHLB Cincinnati needs your help in assessing the magnitude of this exposure with respect to pledged collateral. So beginning in October, we will be asking for your estimate of LIBOR-indexed collateral pledged to the FHLB.

Of primary interest are pledged loans linked to LIBOR that mature after the year 2021. We will also ask about note provisions that allow the rates on these assets to move to an alternative index.

It is okay if you don’t know these details yet, however, in such instances we’d like to hear about your intentions and timeline to determine this exposure. We understand this may be a large undertaking for your company but we believe it is time to begin to have these discussions. Regardless of whether your institution will have quantified exposure levels by the end of September, a response to our LIBOR survey is required by October 31, 2020. A failure to submit a response will affect your ability to borrow from the FHLB after that date.

We will be rolling out an on-line LIBOR exposure reporting option starting October 1 via our Members Only site. If you do not have Members Only access, we would be happy to help you get setup, or the form which you can complete and submit via email is available here. We ask that members provide quarterly updates of LIBOR indexed collateral exposure.

If you have any questions, please feel free to reach out to our Collateral Operations team at the FHLB at CollateralOperations@fhlbcin.com or toll free at (800) 828-4191 (please select option 3 when calling in), or – if you call us direct, please request to speak to someone regarding LIBOR-indexed collateral. To assist with common questions that you may have, please see below.

Is the FHLB accepting LIBOR-linked collateral as eligible collateral?

The FHLB continues to accept pledges of loan- and securities-collateral indexed to LIBOR. At this time, there is no difference in lendable values for such collateral. Even if you are still originating loans indexed to LIBOR, or purchasing securities indexed to LIBOR – these may still be pledged to the FHLB, with no difference in lendable value from any other “like” loan or security. We do anticipate that the lendable value from LIBOR indexed collateral will be decreased in 2021, likely in the second quarter of the year.

Is the FHLB providing borrowing capacity against LIBOR-indexed collateral, and will the FHLB continue to do so?

Yes we are extending borrowing capacity against this collateral. The FHLB will continue to offer borrowing capacity against all pledged collateral that is indexed to LIBOR (assuming all other features of the pledged collateral are FHLB-eligible) and anticipate that we will continue to do so into the fourth quarter of 2021. However, the availability of capacity in 2022 and beyond is uncertain at this time. The FHLB will provide ample advance notice of any changes in lendable values or loan eligibility.

The potential change to a member’s borrowing capacity relating to the LIBOR-indexed feature may come sometime in the future, once the FHLB has a better understanding of the types of transition language that exists in our members’ pledged collateral, and in the event that the open markets evidence reasonable justification for such a risk adjustment.

Why is the FHLB asking me to report LIBOR-indexed exposure?

LIBOR cessation is likely. You may find it informative to read our FAQ on the LIBOR transition that discusses when LIBOR will become unavailable or less reliable. It is important that the FHLB and its membership understand exposure levels in event their values deteriorate or should they be deemed ineligible to support FHLB advances in the future.

How do I communicate my LIBOR-indexed exposure to the FHLB?

The FHLB is offering members two channels for relaying its on-going LIBOR exposure. We are rolling out an online reporting tool (that will be available by October 1) that will assist members in communicating exposure. This reporting will be facilitated through our Members-Only website, with an alternative method for reporting on our public website. We will start asking for your institution’s details as of the end of Q3 and will request that members update this exposure tracking on a quarterly basis.

What will the FHLB do with the information I share?

We will use this information to understand the magnitude of LIBOR Indexed exposure at the member level and within our district, and for analyses of associated risks. We are also required to share aggregate details of LIBOR exposure by loan type category and security type with our regulator, the Federal Housing Finance Agency.

What if I don’t know my LIBOR-indexed exposure yet?

That’s okay – but we encourage you to begin to find out. We understand this may be a big ask and could take some time for you to get your hands around – but we encourage you to start. The first step is understanding and assessing your loan portfolios and prospective business operations. At some point in the near future it will be necessary for members to be able to quantify their exposure to LIBOR, if any, in order to continue to have access to the FHLB’s advance window.

Does the FHLB view all LIBOR-indexed collateral as a potential concern?

To varying degrees yes. The FHLB believes it is important for our members to understand the assets they hold. Generally, if you have LIBOR-indexed assets nearing maturity (i.e. maturing before the end of 2021 that will not be renewed or will be renewed using an alternative index, there is little concern). For LIBOR-indexed collateral that will exist on your books after 2021, the severity of the “risk” depends on the presence of “transition language” within the Promissory Note or associated loan agreement or modification that would allow the note’s holder to name or identify an alternative index and any constraints on its ability to do so. Common types of transition language may include:

  • The holder of the Note may name any alternative index.
  • The Note may convert the rate to a fixed-rate or specified alternative variable-rate or variable-rate index.
  • The Note may freeze the index at its last known value for the remainder of the loan’s life.

The absence of transition language is of greatest concern and poses the greatest risk of being assigned a reduced lendable value and/or being deemed eligibility to support FHLB credit.