What Is the Reykjavik Interbank Presented Fee (REIBOR)?
The Reykjavik Interbank Presented Fee (REIBOR) is the formal interbank market reference value used to set fees for temporary loans at Icelandic business and fiscal financial savings banks. This is a weighted reasonable of market fees introduced by the use of banks to each other for temporary funding.
REIBOR is similar to other benchmark fees, such for the reason that secured in one day financing value (SOFR). Icelandic banks and lenders use REIBOR (plus a variety) as the basis for setting the rate on loans they make to nonbank borrowers. The REIBOR is fairly new as it most effective formally set to work in 1998.
Key Takeaways
- REIBOR is a benchmark reference value in keeping with temporary interest rates introduced between Icelandic banks, and it is used to set other interest rates in Iceland.
- REIBOR is calculated and revealed by the use of Iceland’s Central Monetary establishment and is similar to other benchmark fees, very similar to SOFR.
- The REIBOR market and its relationship to international credit score rating markets were parts inside the essential financial crisis that Iceland professional beginning in 2008.
Understanding the Reykjavik Interbank Presented Fee (REIBOR)
The Central Monetary establishment of Iceland regulates the REIBOR and interbank foreign exchange echange markets. Iceland’s major banks negotiate loans for temporary value vary inside the Icelandic overseas cash, the krona, underneath Central Monetary establishment laws. Market making banks may just make bids to the interbank market that stretch in one day, one week, two weeks, 3 months, six months, 9 months, and 12 months.
In December 2019, the Central Monetary establishment of Iceland said it will prevent tick list 9- and 12-month REIBOR fees, as no interbank loans had been made at the ones words since 2008. Given that inception of the REIBOR market, more than 90% of amount had been for loan words of one week or a lot much less. Banks would however be required to position up quotes for loans from in one day to six months. They may also offer quotes for 9- and 12-month loans within the tournament that they make any, alternatively the Central Monetary establishment would not tick list those fees.
Icelandic banks submit quotes for fees on temporary deposits and loans to the Central Monetary establishment. The Central Monetary establishment then averages the ones quoted fees for fairly a large number of words to calculate the REIBOR reference value, which it lists on a daily basis.
Disadvantages of REIBOR
Iceland is a small country, so REIBOR is normally most effective used in that country to decide fees. REIBOR is maximum incessantly fairly higher than other major interbank fees used in international markets. That creates a boost trade as foreigners seek a greater return on their temporary value vary. Higher interest rates moreover contributed to monetary instability in Iceland.
All through the early years of the 21st century, Iceland’s financial sector ballooned in a huge credit score rating bubble fueled by the use of easy get right of entry to to world credit score rating markets. Iceland’s banks grew to 9 events the size of the country’s Gross House Product (GDP).
There were massive inflows of deposits from Britain and the Netherlands in search of the fairly high return on REIBOR-based deposit accounts. Iceland grow to be overly relying on other world places’ economies staying afloat and those world places’ voters and firms paying off their debt.
As the global bubble burst and world credit score rating markets were given right here to a halt, Iceland professional a essential financial crisis of its private from 2008-2011. The REIBOR value soared between 2003 and 2008. For the everyday Icelander, value hikes ended in mortgage fees to skyrocket, hitting a worth of 18% in October of 2008.
Iceland used to be as soon as on the brink of bankruptcy when the World Monetary Fund (IMF) intervened with a bailout plan. It took the better part of a decade for the industrial device to go back once more to its previous levels.
