Overnight indexed swap

<h2 id="liborois-spread">LIBOR–OIS spread</h2>
The LIBOR–OIS spread is the difference between IRS rates, based on the <a href="/facts/London_Interbank_Offered_Rate/NSACUahT">LIBOR</a>, and OIS rates, based on overnight rates, for the same term. The spread between the two rates is considered to be a measure of health of the banking system.<a class="footnote-ref" id="fnref:2" href="#fn:2">2</a> It is an important measure of risk and liquidity in the money market,<a class="footnote-ref" id="fnref:3" href="#fn:3">3</a> considered by many, including former <a href="/facts/US_Federal_Reserve/VaCV51ne">US Federal Reserve</a> chairman <a href="/facts/Alan_Greenspan/fH2B5yWb">Alan Greenspan</a>, to be a strong indicator for the relative stress in the <a href="/facts/Money_market/3rU2z9pm">money markets</a>.<a class="footnote-ref" id="fnref:4" href="#fn:4">4</a> 
A higher spread (high Libor) is typically interpreted as indication of a decreased willingness to lend by major <a href="/facts/Bank/l7VsKwas">banks</a>, while a lower spread indicates higher liquidity in the market. As such, the spread can be viewed as indication of banks' perception of the <a href="/facts/Creditworthiness/6jbaLoAR">creditworthiness</a> of other financial institutions and the general availability of funds for lending purposes.<a class="footnote-ref" id="fnref:5" href="#fn:5">5</a>
The LIBOR–OIS spread has historically hovered around 10 <a href="/facts/Basis_point/sqx8t5BW">basis points</a> (bps). However, during the <a href="/facts/2008_financial_crisis/qw8n1pSN">2008 financial crisis</a>, the spread spiked to an all-time high of 364 basis points in October 2008, indicating a severe <a href="/facts/Credit_crunch/ELcKLLpy">credit crunch</a>. Since that time the spread has declined erratically but substantially, dropping below 100 basis points in mid-January 2009 and returning to 10–15 basis points by September 2009.<a class="footnote-ref" id="fnref:6" href="#fn:6">6</a>

<h2 id="risk-barometer">Risk barometer</h2>
3-month LIBOR is generally a floating rate of financing, which fluctuates depending on how risky a lending bank feels about a borrowing bank. The OIS is a <a href="/facts/Interest_rate_swap/cJyud3Jn">swap</a> derived from the overnight rate, which is generally fixed by the local <a href="/facts/Central_bank/5j5xg3s2">central bank</a>. The OIS allows LIBOR-based banks to borrow at a fixed rate of interest over the same period. In the United States, the spread is based on the LIBOR <a href="/facts/Eurodollar/kt52SrmT">Eurodollar</a> rate and the <a href="/facts/Federal_Reserve_System/VaCV51ne">Federal Reserve's</a> <a href="/facts/Federal_funds_rate/H2xd8m5o">Fed Funds rate</a>.<a class="footnote-ref" id="fnref:7" href="#fn:7">7</a>
LIBOR is risky in the sense that the lending bank loans cash to the borrowing bank, and the OIS is stable in the sense that both <a href="/facts/Counterparty/Fvl8gRHb">counterparties</a> only swap the floating rate of interest for the fixed rate of interest. The spread between the two is, therefore, a measure of how likely borrowing banks will default. This reflects counterparty <a href="/facts/Credit_risk/6jbaLoAR">credit risk</a> premiums in contrast to <a href="/facts/Liquidity_risk/6eVYQWTx">liquidity risk</a> premiums.<a class="footnote-ref" id="fnref:8" href="#fn:8">8</a> However, given the mismatch in the tenor of the funding, it also reflects worries about liquidity risk as well.

<h2 id="historical-levels">Historical levels</h2>
In the United States, the LIBOR–OIS spread generally maintains around 10 bps. This changed abruptly, as the spread jumped to a rate of around 50 bps in early August 2007 as the financial markets began to price in a higher risk environment. Within months, the <a href="/facts/Bank_of_England/9ITfYV3q">Bank of England</a> was forced to rescue <a href="/facts/Nationalisation_of_Northern_Rock/NG763aYx">Northern Rock</a> from failure. The spread continued to maintain historically high levels as the <a href="/facts/Subprime_mortgage_crisis/E42h1pSY">crisis</a> continued to unfold.<a class="footnote-ref" id="fnref:9" href="#fn:9">9</a>
As markets improved, the spread fell and as of October 2009, stood at 10 bps once again, only to rise again as struggles of the <a href="/facts/PIIGS/3CRQslow">PIIGS</a> countries threatened European banks. The spread varied from 10 to 50 bps up through February 2018. As of March 2018, the spread again stands at 50+ bps level.<a class="footnote-ref" id="fnref:10" href="#fn:10">10</a>
Whilst liquidity is provided in excess by monetary policy authorities the LIBOR-OIS is less of an indicator of stress.

<h2 id="see-also">See also</h2>
<ul><li><a href="/facts/Multi-curve_framework/cJyud3Jn">Multi-curve framework</a></li>
<li><a href="/facts/TED_spread/FJWTSM8w">TED spread</a></li></ul>

<h2 id="external-links">External links</h2>
<ul><li><a href="https://web.archive.org/web/20120110071410/http://www.businessweek.com/news/2011-10-24/dollar-libor-ois-spread-at-2-year-high-amid-europe-bank-concern.html">Dollar Libor–OIS Spread at 2-Year High Amid Europe Bank Concern</a></li></ul>

<h2 id="references">References</h2>

<ol>
<li id="fn:1">"CSFB Zurich note on OIS" (PDF). 2021-03-13. Archived (PDF) from the original on 2021-03-13. Retrieved 2021-03-13. <a href="http://janroman.dhis.org/finance/OIS/OIS_Note_CSFB_Zurich.pdf" target="_blank">http://janroman.dhis.org/finance/OIS/OIS_Note_CSFB_Zurich.pdf</a> <a href="#fnref:1" class="footnote-back-ref">↩</a></li>
<li id="fn:2">Sengupta, Rajdeep and Yu Man Tam. (2008) The LIBOR–OIS Spread as a Summary Indicator. Economic Synopses, Number 25, 2008. Federal Reserve Bank of St. Louis <a href="http://research.stlouisfed.org/publications/es/08/ES0825.pdf" target="_blank">http://research.stlouisfed.org/publications/es/08/ES0825.pdf</a> <a href="#fnref:2" class="footnote-back-ref">↩</a></li>
<li id="fn:3">Zeng, Min (September 20, 2008). "Money Flows Back to Commercial Paper". The Wall Street Journal. <a href="https://www.wsj.com/articles/SB122182900317256613" target="_blank">https://www.wsj.com/articles/SB122182900317256613</a> <a href="#fnref:3" class="footnote-back-ref">↩</a></li>
<li id="fn:4">Brown, Matthew; Finch, Gavin (January 12, 2009). "Libor for Dollars Slides Most Since Dec. 17 on Cash Injections". Bloomberg.com. <a href="https://www.bloomberg.com/apps/news?pid=20601087&sid=aOxAa22fbxKU" target="_blank">https://www.bloomberg.com/apps/news?pid=20601087&sid=aOxAa22fbxKU</a> <a href="#fnref:4" class="footnote-back-ref">↩</a></li>
<li id="fn:5">Capo McCormick, Liz (January 24, 2008). "Interest-Rate Derivatives Signal Banks Still Reluctant to Lend". Bloomberg.com. <a href="https://www.bloomberg.com/apps/news?pid=20601009&sid=angq2PsOg5Io" target="_blank">https://www.bloomberg.com/apps/news?pid=20601009&sid=angq2PsOg5Io</a> <a href="#fnref:5" class="footnote-back-ref">↩</a></li>
<li id="fn:6">"3 MO LIBOR – OIS SPREAD". Bloomberg.com. January 12, 2009. <a href="https://www.bloomberg.com/apps/quote?ticker=.LOIS3:IND" target="_blank">https://www.bloomberg.com/apps/quote?ticker=.LOIS3:IND</a> <a href="#fnref:6" class="footnote-back-ref">↩</a></li>
<li id="fn:7">Sengupta, Rajdeep and Yu Man Tam. (2008) The LIBOR–OIS Spread as a Summary Indicator. Economic Synopses, Number 25, 2008. Federal Reserve Bank of St. Louis <a href="http://research.stlouisfed.org/publications/es/08/ES0825.pdf" target="_blank">http://research.stlouisfed.org/publications/es/08/ES0825.pdf</a> <a href="#fnref:7" class="footnote-back-ref">↩</a></li>
<li id="fn:8">Sengupta, Rajdeep and Yu Man Tam. (2008) The LIBOR–OIS Spread as a Summary Indicator. Economic Synopses, Number 25, 2008. Federal Reserve Bank of St. Louis <a href="http://research.stlouisfed.org/publications/es/08/ES0825.pdf" target="_blank">http://research.stlouisfed.org/publications/es/08/ES0825.pdf</a> <a href="#fnref:8" class="footnote-back-ref">↩</a></li>
<li id="fn:9">Sengupta, Rajdeep and Yu Man Tam. (2008) The LIBOR–OIS Spread as a Summary Indicator. Economic Synopses, Number 25, 2008. Federal Reserve Bank of St. Louis <a href="http://research.stlouisfed.org/publications/es/08/ES0825.pdf" target="_blank">http://research.stlouisfed.org/publications/es/08/ES0825.pdf</a> <a href="#fnref:9" class="footnote-back-ref">↩</a></li>
<li id="fn:10">"Why It Matters That the Libor-OIS Spread Is Widening: QuickTake". Bloomberg.com. March 9, 2018. <a href="https://www.bloomberg.com/news/articles/2018-03-09/why-it-matters-that-the-libor-ois-spread-is-widening-quicktake" target="_blank">https://www.bloomberg.com/news/articles/2018-03-09/why-it-matters-that-the-libor-ois-spread-is-widening-quicktake</a> <a href="#fnref:10" class="footnote-back-ref">↩</a></li>
</ol>

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