LIBOR–OIS spread: Difference between revisions
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The '''Libor-OIS''' is the difference between [[London Interbank Offered Rate|LIBOR]] and the [[overnight indexed swap]] rate. The spread between the two rates is considered to be a measure of health of the banking system.<ref name="Thorton" >[http://research.stlouisfed.org/publications/es/09/ES0924.pdf Thorton, Daniel L. (2009) What the Libor-OIS Spread Says. Economic Synopses, Number 24, 2009. Federal Reserve Bank of St. Louis]</ref> |
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==Risk Barometer== |
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3-month LIBOR is generally floating rate of financing, which fluctuates depending on how risky a lending bank feels about a borrowing bank. The OIS is a [[Interest rate swap|swap]] derived from the overnight rate, which is generally fixed by the local [[central bank]]. The OIS allows LIBOR banks to borrow at a fixed rate of interest over the same period. In the [[United States]] the spread is based on the LIBOR [[Eurodollar]] rate and the [[Federal Reserve System|Federal Reserve's]] [[Federal funds rate|Fed Funds rate]].<ref name="Sengupta">[http://research.stlouisfed.org/publications/es/08/ES0825.pdf Sengupta, Rajdeep and Yu Man Tam. (2008) The LIBOR-OIS Spread as a Summary Indicator. Economic Synopses, Number 25, 2008. Federal Reserve Bank of St. Louis]</ref> |
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LIBOR is ''risky'' in the sense that the lending bank loans cash to the borrowing bank, and the OIS is considered ''stable'' as both [[Counterparty|counterparties]] only swap the floating rate of interest for the fixed rate of interest. The spread between the two is therefore a measure of how likely borrowing banks will default. This reflects ''[[Risk premium|risk premiums]]'' in contrast to ''[[Liquidity premium|liquidity premiums]]''.<ref name="Thorton"/> |
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==Historical levels== |
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In the United States, the LIBOR-OIS spread generally maintains around 10bps. This changed abruptly, as the spread jumped to a rate of around 50bps in early August 2008 as the financial markets began to price in a higher risk environment. Within months, the [[Bank of England]] was forced to rescue [[Nationalisation of Northern Rock|Northern Rock]] from failure. The spread continued to maintain historically high levels as the [[Subprime mortgage crisis|crisis]] continued to unfold. <ref name="Sengupta"/> |
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As markets improved, the spread fell and as of October 2009, remain around 10bps once again. |
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==See Also== |
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*[[TED Spread]] |
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*[[Overnight indexed swap|OIS]] |
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==References== |
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<references/> |
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[[Category:Interbank offered rates]] |
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[[Category:Economics terminology]] |
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Latest revision as of 02:45, 28 February 2013
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