The functioning of the Norwegian money market is unsatisfactory. Interest premiums have generally been higher in Norway than in other countries, also following the financial crisis. There are few incentives under the existing system for managing private bank reserves to redistribute liquidity reserves in the interbank market. Activity is low and an efficient overnight market in Norwegian kroner is lacking.

Norges Bank is seeking to improve the functioning of the Norwegian money market. Measures to improve NIBOR quoting must be seen in connection with measures designed to change banks’ reserve management system (see Norges Bank’s submission to Finance Norway (FNO) of 6 October 2010, “Changes in Regulation on the Access of Banks to Borrowing and Deposit Facilities in Norges Bank etc.” and appurtenant consultative document.

The quoting of interbank rates in Norway is little formalised and interest rate formation can be difficult to understand for third parties. There is no sufficient quoting of interbank rates directly in Norwegian kroner, neither for overnight loans nor longer maturities.

One important reference rate in the Norwegian money market is the NIBOR rate (Norwegian Interbank Offered Rate). NIBOR is derived from the rate on a similar loan in the US dollar market plus the interest rate differential between Norwegian kroner and US dollars from the forward exchange market.

Six banks established in Norway are currently quoting NIBOR for periods from tomorrow/next (T/N, the rate from tomorrow until the next business day) and up to 12 months. The reference rate calculation – the fixing - is done at noon every day by Reuters which calculates the average rate after eliminating the highest and the lowest rate. The NIBOR fix is purely indicative and banks are not obliged to trade on their quoting rates.

The NIBOR panel banks are themselves setting the rules regarding which banks should participate in the fix and the computation of the rate. There are no publicly available agreements or set of rules. As to Norges Bank’s knowledge, a NIBOR panel bank must be established in Norway, actively quoting Norwegian interest rate products during market opening hours on all Norwegian banking days, and have access to F-loans in Norges Bank. There is however little available information about the criteria. An impression that the banks are not interested in transparency could therefore easily be formed.  NIBOR rates reflecting actual market developments could encourage increased participation among international banks in particular in the market. This would promote Norwegian banks’ reputation over time and lead to better conditions for swap agreements and other trades. Norges Bank believes it is in Norwegians banks’ own long-term interest to sort this out.  

In a liquid market, an overnight rate will be the first point on a yield curve on interbank loans directly in Norwegian kroner. The objective of Norges Bank’s liquidity management is to ensure that the short-term money market rates remain close to the key policy rate. The NIBOR panel banks quote T/N rates on Reuters, but there is little information regarding the actual price of short-term loans as the quoted bid-ask spreads are very wide. From these quotes alone, the T/N rate is practically unobservable. For that reason, Norges Bank computes its own T/N rate based on trades in the Norwegian forward exchange market. It is desirable to establish a general observable short-term rate in the Norwegian money market. 

The calculation of reference rates in other countries is more formalised and transparent.
CIBOR (Copenhagen Interbank Offered Rate) is a reference rate for unsecured money market lending in Danish kroner. The Danish Bankers Association administrates the reporting CIBOR banks.  Correspondingly, the EURIBOR (Euro Interbank Offered Rate) refers to the interbank rate for euros reported as a reference rate on behalf of the European Banking Federation (EBF) and Financial Market Association (ACI). In London, the LIBOR (London Interbank Offered Rate) is calculated on the basis of rules drawn up by the BBA (British Bankers’ Association).

An overnight rate (T/N rate in Denmark) based on the volume of business dealt at each rate is also calculated in these countries. A selection of banks report daily turnover and corresponding lending rates in the overnight interbank market. The central banks in both Denmark and the euro area are responsible for the reference rate computation.

Common for all these reference rates are the publicly available regulations. Moreover, committees setting criteria for participating banks, monitoring of banks’ behaviour in the fixing process and addressing issues concerning irregularities have been established.  

Against this background, Norges Bank will encourage Finance Norway (FNO) to take on the responsibility of establishing a publicly available set of rules for the NIBOR fixing in accordance with best international practice. The regulations should be developed under the auspices of FNO in collaboration with ACI Norway and the Norwegian Society of Financial Analysts. Norges Bank can assist with this work.  Furthermore, Norges Bank will encourage FNO to take an initiative for computing and publishing an overnight rate for Norwegian kroner based on actual turnover in the interbank market. Norges Bank can take responsibility for the computation of the overnight rate in accordance with regulations decided by the banks in collaboration with FNO.

It is desirable to introduce a new regulation for NIBOR quoting prior to the implementation of a new system for banks’ reserve management. The new system is scheduled to be implemented from the latter half of 2011.

Regards

Svein Gjedrem

Kristine Falkgård

Copy:  DnB NOR, Nordea Bank Norge, Fokus Bank, Handelsbanken Norge, SEB Norge, Swedbank Norway, the Financial Supervisory Authority of Norway