On the other hand, it is important in managing liquidity risk to strike the appropriate balance between actively deploying funds through loans and investments and in retaining enough of a defensive position so that liquidity is available when the need arises. Again, this poses its own challenges for rural banks because of the narrower exposures from focused lending to a local community.
But in most cases, transition to an overnight RFR is feasible and a range of products that previously referenced LIBOR have successfully transitioned to RFRs. Use of the available overnight RFRs compounded in arrears is preferable to the alternative of using a forward-looking term or credit-spread adjusted RFR that is not robust.