i understand that the libor is the rates bank charge each other. but can someone plz explain how to interpret the OIS rate, and also how to interpret the LIBOR OIS Spread. I know its supposed to be a measure of funds availability in the money market but how? Thanks!
My understanding of this is as follows. OIS is the overnight index swap rate while LIBOR is the London Interbank Offered Rate. LIBOR is the rate at which banks lend each other money overnight WITHOUT posting collateral. OIS is the future expected policy rate that the market is expecting for the Fed Funds Rate. The Fed Funds rate is the rate that a bank can borrow funds from another bank THAT HAS A SURPLUS IN ITS ACCOUNT WITH THE FEDERAL RESERVE. The federal funds rate is a target interest rate that is fixed by the FOMC for implementing U.S. monetary policies while LIBOR is calculated from prevailing interest rates between highly credit-worthy institutions. Therefore, lets first establish that LIBOR is MORE than OIS due to the lack of collateral among interbank borrowing. With this as background, what are the things that would CAUSE the spread between LIBOR and OIS to widden [increase]. Basically there are two things: credit risk [since again LIBOR loans are NOT collateralized] and in the extreme case all out bank failure…and…a short of capital…i.e. no gas in the tank, no juice in the cup no money in the vault. This is key because the way a bank makes money is by loaning out money, to do this, the bank needs capital. Without capital a bank cannot operate a loan portfolio, which basically means it folds. As a result, the spread has widdened - I think - because most banks are now INTENTIONALLY not lending money to other banks either from a protection perspective [i.e. they want to hang on to as much capital for themselves as possible] which is your interpretation funds availability. Does this help? Willy
Very interesting question. Not sure I completely agree with “a measure of funds availability in the money market” because there is a credit component as well. Check this out: http://www.voxeu.org/index.php?q=node/1188 Edit: overlapped above looks good to me
JDV, That’s a good site. They talk about predatory bank operations on that site and I’m not 100% clear as to the mechanism of predation. What are your thoughts? Willy
minute - terrible f-ing fill yelling at broker ba$turd
And JDV nicks my link and gets all the credit for my googling skillz? WTF?
I didn’t nick your link; I borrowed it.
Oh yeah? Like you “borrowed” pink’s WSJ?
thanks a lot guys. willy your explanation was very helpful thx. how about the BA OIS spread? Does this measure the same thing as teh LIBOR OIS Spread, except that its specific to a particular bank, whereas the LIBOR OIS is for all banks in general?
Good summary Willy but one thing, interbank lending in the Fed Funds market is unsecured. Direct lending by the Fed to the banking system, however, is secured. The Fed attempts to control the interbank Fed Funds rate (the effective Fed Funds rate) by injecting reserves into and sucking reserves out of the banking system by buying and selling securities from their portfiol (or via repos). the vast majority of Fed Funds lending is of the interbank, unsecured variety.
jimjohn Wrote: ------------------------------------------------------- > how about the BA OIS spread? This measures the time taken for Mr Baracus to modify the van.
anyone else familiar with the BA OIS spread? BA = bankers acceptance.
jimjohn Wrote: ------------------------------------------------------- > thanks a lot guys. willy your explanation was very > helpful thx. > > how about the BA OIS spread? Does this measure the > same thing as teh LIBOR OIS Spread, except that > its specific to a particular bank, whereas the > LIBOR OIS is for all banks in general? I’ll bet the BA OIS is some Canadian thing. LIBOR is settled daily by some polling thing among London banks. The Banker’s acceptance rate used for the BA OIS spread is probably done in some similar way. There is a futures contract on Banker’s acceptances which I have traded, but never looked up exactly the way they settle BA (note a BA is a money market instrument used for international trade).
thx joey! you’re right because all my google searches on BA OIS spread resulted in Canadian links.