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Estimating Long-Term Bank Lending Rates from Bank Bond Prices

Article Quant Q&A · Author: Praveen
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Summary

The document addresses how to think about interbank lending rates at tenors longer than the daily quoted LIBOR maturities, with a focus on rates beyond twelve months. Its answer suggests looking at yields on bonds issued by banks as the closest available market evidence for longer-term bank borrowing or lending costs. This is presented as a practical proxy rather than a direct quoted long-tenor LIBOR rate.

It distinguishes that question from long-dated interest rate swaps, which exchange a fixed rate against shorter-tenor LIBOR. Such swap rates describe the pricing of a swap contract and should not be interpreted as direct evidence of a bank’s unsecured lending rate beyond a year. The response is brief and provides no calculation, data source, or empirical comparison. It also does not discuss credit, liquidity, or term-premium adjustments in bank bond yields, so those factors limit how directly bond prices can be read as lending rates.

Key ideas

  • Bank bond trading levels can serve as a proxy for longer-term bank funding costs.
  • A long-dated swap rate is a fixed rate exchanged against shorter-tenor LIBOR.
  • Swap rates do not directly represent interbank lending rates beyond twelve months.
  • Bond yields may reflect factors beyond lending rates, and the response gives no adjustment method.

Tags

Fixed incomeStatistics
Full text
# How are LIBOR rates beyond 12M arrived at?


# How are LIBOR rates beyond 12M arrived at?












I understand LIBOR rates quoted on a daily basis upto 12 M tenors. But how are rates beyond 12M tenor estimated. I got this question from an interviewer.

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/35722

If you want to estimate interbank lending rates beyond 12 months, the best you can do is look at where bonds issued by banks are trading.

Sometimes there is loose talk (even by interviewers) that may confuse this with long term swap rates, which are contracts to exchange a fixed rate for 3 or 6 month libor. However this has nothing to do with bank lending beyond 12 months.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.