AMERIBOR, a reference rate based on overnight interbank loans, has much better cyclical properties than the other alternative overnight rates, according to a new white paper by the American Financial Exchange (AFX).
The new research, AMERIBOR: A Better Credit Sensitive Reference Rate, in coordination with the University of Massachusetts Amherst’s Marco Macchiavelli, Assistant Professor of Finance with the Isenberg School of Management and former Principal Economist at the Federal Reserve, examines reference rate options following the cessation of LIBOR in July 2023.
The paper’s author, Professor Macchiavelli, said: “My research has indicated that access to CSRs are important for smaller financial institutions, especially during times of market stress.”
“Since the cessation of LIBOR last year, rates like AMERIBOR have filled the void and supplied these institutions with a beneficial benchmark rate that fulfills the requirements of their borrowing and lending needs,” he added.
The new white paper demonstrates the benefits of credit-sensitive rates (CSRs), with key takeaways including: CSRs are beneficial for smaller financial firms during times of market stress; during the COVID-19 pandemic, commercial banks indexing their credit lines to SOFR may have received lower returns while facing higher borrowing costs; and SOFR does not capture the marginal funding costs of commercial and regional banks.
“In a horse race among alternative rates, AMERIBOR is significantly and positively correlated with LIBOR. This is true both in normal times and especially in crisis times, when SOFR and EFFR negatively comove with LIBOR,” he said.
Professor Macchiavelli said that banks should index their loans to AMERIBOR in order to better manage interest rate risk and keep net interest margins stable and positive at all times, even during crises.
Last year, IOSCO tried to abolish credit-sensitive rates, such as Bloomberg’s BSBY (later leading to its cessation) and the American Financial Exchange’s (AFX) AMERIBOR – a credit-sensitive benchmark interest rate – which disadvantaged America’s community/regional banks in the process.
The index is calculated as the transaction volume weighted average interest rate of the daily
transactions in the AMERIBOR overnight unsecured loan market on the AFX platform.
As the provider of AMERIBOR, AFX offers a credit-sensitive benchmark interest rate that is a true reflection of the lending and borrowing costs for America’s regional and community banks.
AFX CEO, John Shay, said: “The research conducted by Professor Macchiavelli underscores the need for a credit-sensitive rate. Community and regional banks are the backbone of America’s financial system. At AFX, we are proud to continue offering the AMERIBOR rate to best serve our 250 member banks across the country.”
