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Loan and Deposit Pricing After the IBOR Transition

Article Quant Q&A · Author: Ivan
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Summary

The document raises a fixed income valuation question about replacing term IBOR benchmarks with overnight rates derived from collateralized transactions. It points out that overnight benchmarks provide a single rate, while the former IBOR settings included multiple tenors, and that the described swap market has a gap between the overnight rate and the first liquid one year instrument.

It asks how this change affects the yield curve used to price loans and deposits, assuming there are no liquid futures on the overnight rate. The text does not propose a curve construction method, provide valuation examples, or report empirical evidence; it frames an open question. Any practical answer would depend on market instruments, conventions, and the approach used to estimate rates in the short end gap.

Key ideas

  • The transition replaces surveyed term IBOR settings with transaction based overnight benchmarks.
  • Overnight benchmarks have no set of published monthly or quarterly tenors in the setup described.
  • The document identifies a gap between the overnight rate and the first liquid one year swap instrument.
  • It asks how that short end gap affects loan and deposit valuation.

Tags

Fixed income
Full text
# Loan/depo pricing consequences of IBOR transition


# Loan/depo pricing consequences of IBOR transition












Regulators phase out the use of surveyed IBOR rates in favour of overnight indexes calculated from actual collateralized transactions (ESTR, SOFR…). These have no variety of periods, only 1 rate. IBOR rates had 1M, 3M, 6M… Thus there is a 1Y gap between the o/n base rate and the first liquid IRS of 1Y tenor. The yield curve from o/n all the way to the back end of the swap curve is the basis for loan/depo pricing. What are the practical loan/depo valuation consequences of dropping the short end tenor periods? Please assume no liquid term futures on the o/n rate exist.

Many thanks! Ivan

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