The nature and causes of the Norwegian interbank offered rate

Abstract

The importance of interbank rates for unsecured funding has increased vastly the last decades with the expansion of nancial instruments. Today's interbank rates are arguably the most in uential benchmarks in pricing of assets and an important indicator on the state an economy. In the aftermath of the nancial crisis, the awareness of weaknesses of interbank rates surfaced. The awareness has led to a tightening of the regulations regarding the Norwegian Interbank O ered Rate (NIBOR). The purpose of this paper is to identify the nature of NIBOR in both a domestic and international context, and expand on NIBOR's ability to accurately re ect the lending cost between Norwegian prime banks. The rst part of the paper uses the Nelson-Siegel and Vasicek models to compare o ered rates against observable nancing cost using unsecured corporate bonds. NIBOR has historically been quoted higher than both STIBOR and EURIBOR, and we nd that Norwegian banks contributing to NIBOR and STIBOR face the same nancing costs as European banks contributing to EURIBOR. This implies that the di erences between interbank rates cannot be justi ed by higher nancing costs. When comparing the interbank rates to domestic nancing costs, we are unable to determine if banks contributing to NIBOR are more or less accurate in the Norwegian interbank market compared to other interbank markets where these banks are present. In the second part of the paper, we compare individual interest rate quotes to credit default swaps, and observe an inconsistent relationship between panel banks' quotes and their market priced risk over time. By applying a hidden markov model, we examine individual short term behavioral dynamics during the opening of the day, and preceding the xing. Our results indicate that interpretation of information varies across participants, which is a possible weakness of the governance structure.