A Study of Stibor - Sweden’s Most Important Number and the Rates That Could Come to Replace It

Abstract

As a working group named AGAR is currently looking into replacements and complements to Stibor, the subject of reference rates will become increasingly relevant in the coming years. This paper therefore investigates Stibor as well as future options for a Swedish reference rate, consolidating information of and opinions on reference rates in Sweden, primarily through the review of previous literature in the field and expert interviews with representatives of organisations in AGAR. The paper identifies four problems with Stibor as of today, which includes a lack of volume on the interbank market as well as a lack of transparency in the Stibor framework. Based on the identified problems and the theoretical background, the paper presents five criteria that a sound reference rate needs to satisfy: achieving transparency, being robust, being market adapted, reflecting appropriate risk and fulfilling BMR. These criteria then serve as a basis in discussing the different consideration that have to be made when constructing a reference rate in Sweden. These considerations include whether a reference rate in Sweden should be transaction-based or assessment-based, whether a transactions-based rate should be unsecured or secured, and how much basis risk a new reference rate would cause. Finally, in view of these considerations, the authors suggest that a predominantly transaction-based, uncollateralized, overnight rate administered by a governmental authority, such as the Riksbank, is suitable to replace Stibor and that the process to switch to such an alternative reference rate should be started promptly.

Popular Abstract

Sweden’s most important number might be outdated – what’s next?

The Stockholm Interbank Offered Rate, or Stibor, is a Swedish rate that is used in countless financial contracts, underpinning a nominal value of 60,000 billion Swedish kronas. This paper presents alternatives to Stibor and argues for why it is time to replace it.

Since its launch in the 1980’s, Stibor has gained an important role in the Swedish financial system. Today, it is used as the benchmark rate in a large number of financial contracts, including corporate loans, floating rate notes and derivatives. The consequence of this is that the value of a lot of contracts depends on the level of Stibor, making it important that the rate cannot be manipulated and is trusted to be accurate.

However, following events in 2012, the market’s trust in rates similar to Stibor was suddenly diminished. It was revealed that a cousin of Stibor, the London Interbank Offered rate, or Libor, for years had been systematically manipulated by banks and traders. The aftermath, besides record-large fines and jail time, was that many countries decided to move away from Interbank Offered Rates, such as Libor, to other rates, so called alternative references rates.

Despite of this, in Sweden no major changes were seen. Since no evidence was found that Stibor specifically had ever been manipulated, no immediate plans were made to abandon the rate. It was not until 2018 when the organisation responsible for Stibor, the Swedish Bankers’ Association, launched a working group to investigate complements and replacements to Stibor that the discussion of replacing Stibor really got started. This means that the subject of reference rates is likely to become more relevant in Sweden in the coming years as more people become aware of the issues. This paper therefore investigates Stibor and discusses potential future options for a Swedish rate with the aim that anyone who is interested in the subject can get an understanding of the process of switching reference rates as well as form their own opinion on the matter.

With the help of reports from central banks around the world, written material from economists as well as expert interviews, the authors identify the problems with the current rate, define criteria for a sound reference rate, discuss important considerations when selecting a new rate and finally present their own conclusions as to what is the best rate for Sweden going forward.

Four problems with Stibor as of today are identified, most pressing being the lack of volume in the market Stibor is based on as well as a lack of transparency in the Stibor framework. The lack of liquidity means that often other means of estimating the submissions must be used, such as expert assessments from the banks themselves. This leaves room for arbitrary results and potential manipulation. The lack of transparency means there is information asymmetry in the market.

These four problems as well as the on-going international movements away from similar rates make up arguments as to why Stibor should be replaced. Instead of Stibor, the authors argue that a predominantly transaction-based, uncollateralized, overnight rate administered by a governmental authority, such as the Riksbank, should replace Stibor. The authors also emphasize the urgency in starting the process promptly, so that synergy effects in switching at the same time as other countries can be utilized.

• author: Nystedt, Anton and Skoglund, Cecilia
• supervisor: Andreas Graflund; Birger Nilsson
• organization: Department of Economics
• course: EXTM10 20191
• year: 2019
• type: H2 - Master's Degree (Two Years)
• subject: Business and Economics
• keywords: Stibor, Libor, ibor rate, reference rate, alternative reference rate, overnight rate
• language: English
• id: 8988924
• date added to LUP: 2019-08-08 10:26:53
• date last changed: 2019-08-08 10:26:53