Reykjavik Interbank Offered Rate (REIBOR)

What Is the Reykjavik Interbank Offered Rate (REIBOR)?

The Reykjavik Interbank Offered Rate (REIBOR) is the formal interbank market reference rate used to set rates for short-term loans at Icelandic commercial and savings banks. It is a weighted average of market rates offered by banks to one another for short-term funding.

REIBOR is like other benchmark rates, for example, the secured overnight financing rate (SOFR). Icelandic banks and lenders use REIBOR (plus a spread) as the basis for setting the rate on loans they make to nonbank borrowers. The REIBOR is somewhat new as it just officially started operating in 1998.

Grasping the Reykjavik Interbank Offered Rate (REIBOR)

The Central Bank of Iceland directs the REIBOR and interbank foreign exchange markets. Iceland's major banks arrange loans for short-term funds in the Icelandic currency, the krona, under Central Bank rules. Market creating banks can make offers to the interbank market that broaden overnight, multi week, two weeks, 90 days, six months, nine months, and one year.

In December 2019, the Central Bank of Iceland said it would stop listing 9-and year REIBOR rates, as no interbank loans had been made on those conditions beginning around 2008. Starting from the initiation of the REIBOR market, over 90% of volume had been for loan terms of multi week or less. Banks would in any case be required to submit statements for loans from overnight to six months. They could likewise offer statements for 9-and year loans assuming that they make any, yet the Central Bank wouldn't list those rates.

Icelandic banks submit statements for rates on short-term deposits and loans to the Central Bank. The Central Bank then averages these quoted rates for different terms to work out the REIBOR reference rate, which it records consistently.

Inconveniences of REIBOR

Iceland is a small country, so REIBOR is generally just utilized in that country to lay out rates. REIBOR is normally to some degree higher than other major interbank rates utilized in global markets. That makes a carry trade as foreigners look for a higher return on their short-term funds. Higher interest rates additionally contributed to economic shakiness in Iceland.

During the early long stretches of the 21st century, Iceland's financial sector expanded in an enormous credit bubble energized by simple access to international credit markets. Iceland's banks developed to nine times the size of the country's Gross Domestic Product (GDP).

There were large inflows of deposits from Britain and the Netherlands seeking the generally high return on REIBOR-based deposit accounts. Iceland turned out to be excessively dependent on other nations' economies remaining above water and those nations' inhabitants and organizations paying off their debt.

As the global bubble burst and world credit markets stopped, Iceland encountered a serious financial crisis of its own from 2008-2011. The REIBOR rate took off somewhere in the range of 2003 and 2008. For the average Icelander, rate hikes caused mortgage rates to soar, hitting a rate of 18% in October of 2008.

Iceland was near the precarious edge of bankruptcy when the International Monetary Fund (IMF) mediated with a bailout plan. It took the better part of a decade for the economy to return to its previous levels.

Highlights

• REIBOR is a benchmark reference rate in view of short-term interest rates offered between Icelandic banks, and it is utilized to set other interest rates in Iceland.
• The REIBOR market and its relationship to global credit markets were factors in the serious financial crisis that Iceland experienced beginning in 2008.
• REIBOR is calculated and distributed by Iceland's Central Bank and is like other benchmark rates, like SOFR.