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What Are Reference Rates For?

Author

Listed:
  • Mr. Divya Kirti

Abstract

What is the precise role of reference rates? Why does it matter if LIBOR was manipulated? To address these questions, I analyze the use of reference rates in floating-rate loans and interestrate derivatives in the context of lending relationships. I develop a simple framework combining maturity transformation with three key frictions which generate meaningful funding risk and a rationale for risk management. Reference rates like LIBOR mitigate contractual incompleteness, facilitating management of funding risk. As bank funding costs move with bank credit risk, it makes sense for the reference rate to have a bank credit risk component. Manipulation can add noise, reducing the usefulness of reference rates for this purpose.

Suggested Citation

  • Mr. Divya Kirti, 2017. "What Are Reference Rates For?," IMF Working Papers 2017/013, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/013
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    Cited by:

    1. Mielus Piotr, 2019. "How to Measure the Economic Integrity of Ibor Panels? A Behavioural Approach," Financial Sciences. Nauki o Finansach, Sciendo, vol. 24(1), pages 51-73, March.
    2. Brugler, James & Khomyn, Marta & Putniņs̆, Tālis, 2025. "Benchmarking benchmarks," Journal of Financial Economics, Elsevier, vol. 168(C).
    3. Heidorn, Thomas & Liem, Erik & Requardt, Stefan & Wahnschaap, Tim, 2025. "US$ interest rate and cross currency swaps after the LIBOR funeral: A corporate treasury primer," Frankfurt School - Working Paper Series 236, Frankfurt School of Finance and Management.
    4. Harry Cooperman & Darrell Duffie & Stephan Luck & Zachry Wang & Yilin (David) Yang, 2025. "Bank Funding Risk, Reference Rates, and Credit Supply," Journal of Finance, American Finance Association, vol. 80(1), pages 5-56, February.
    5. Flavio Angelini & Stefano Herzel & Marco Nicolosi, 2025. "Modeling Euro Area Benchmark Rates After the End of LIBOR," CEIS Research Paper 613, Tor Vergata University, CEIS, revised 07 Oct 2025.
    6. Sven Klingler & Olav Syrstad, 2023. "Does SOFR-linked debt cost borrowers more than LIBOR-linked debt?," Working Paper 2023/7, Norges Bank.
    7. Klingler, Sven & Syrstad, Olav, 2025. "The SOFR discount," Journal of Financial Economics, Elsevier, vol. 164(C).

    More about this item

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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