LIBOR–OIS spread: Difference between revisions

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-{{Merge to|Overnight indexed swap|date=December 2009}}
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-The '''LIBOR–OIS''' is the difference between [[London Interbank Offered Rate|LIBOR]] and the [[overnight indexed swap]] (OIS) rates. 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>
-==Risk barometer==
-Three-month LIBOR is generally a 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-based 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>
-LIBOR is ''risky'' in the sense that the lending bank loans cash to the borrowing bank, and the OIS is ''stable'' in the sense that 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 ''counterparty [[credit risk]] premiums'' in contrast to ''[[liquidity risk]] premiums''.<ref name="Thorton"/> However, given the mismatch in the tenor of the funding, it also reflects worries about liquidity risk as well.
-==Historical levels==
-In the United States, the LIBOR–OIS spread generally maintains around 10{{Not a typo|bps}}. This changed abruptly, as the spread jumped to a rate of around 50{{Not a typo|bps}} in early August 2007 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"/>
-As markets improved, the spread fell and as of October 2009, stood at 10{{Not a typo|bps}} once again, only to rise again as struggles of the [[PIIGS]] countries threatened European banks. As of December 2011, the spread again stands at 40+ bps level.
-==See also==
-*[[TED spread]]
-*[[Overnight indexed swap|OIS]]
-==References==
-<references/>
-==External links==
-*[http://www.bloomberg.com/quote/!LOIS3:IND 3 MO LIBOR - OIS SPREAD]
-*[http://www.businessweek.com/news/2011-10-24/dollar-libor-ois-spread-at-2-year-high-amid-europe-bank-concern.html Dollar Libor-OIS Spread at 2-Year High Amid Europe Bank Concern]
-[[Category:Interbank offered rates]]
-[[Category:Economics terminology]]
-[[es:Diferencial Libor-OIS]]