NIBOR - a Norwegian Interest Rate?

Abstract

Norges Bank has in various contexts pointed out that today’s NIBOR construction has clear weaknesses. The reasons for this view are presented in a letter to Finanstilsynet (Financial Supervisory Authority of Norway) of 26 May 2014, Norges Bank Paper 2/2014 (“Weaknesses in NIBOR”) and in Bernhardsen et al. (2012). Bernhardsen et al. point out, among other things, the difference in risk premiums expressed in NIBOR compared with the Swedish reference rate STIBOR. This comparison is particularly relevant, since a majority of the NIBOR panel banks also quote STIBOR. In the memo “NIBOR – intet mysterium“ [NIBOR – no mystery], Aamdal (2014) argues, for his part, that Swedish money market rates “...ikke gjenspeilet reell pris på usikret likviditet...” [did not reflect the real price of unsecured liquidity]. He points out that a money market rate must reflect the alternative return that banks can obtain by investing in other currencies. This is illustrated by converting NIBOR and STIBOR into equivalent EUR loans and comparing them with the EURIBOR interest rate in the period October 2011 to March 2012. In this commentary, we show that NIBOR reflected a risk premium that was specific to EUR and EURIBOR panel banks. In our view, this risk premium is difficult to justify for NOK and Norwegian banks.