## What Are Reference Rates For?

_IMF Working Papers, January 27, 2017_

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## Bibliographic details
- Authors: Divya Kirti
- Published: January 27, 2017
- Series: IMF Working Papers

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### Overview and purpose
- Title: What Are Reference Rates For?
- Author: Divya Kirti
- Publication date: January 27, 2017
- Publication type: IMF Working Papers
- Central question: What is the precise role of reference rates, and why does it matter if LIBOR was manipulated?

### Key findings and analytical framework
- The paper analyzes the use of reference rates in floating-rate loans and interest-rate derivatives within the context of lending relationships.
- The author develops 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 the purpose of managing funding risk.

### Implications for contracts and risk management
- Reference rates serve to reduce contractual incompleteness in floating-rate contracts and interest-rate derivatives.
- Including a bank credit risk component in reference rates is rational when bank funding costs correlate with bank credit risk.
- Manipulation of reference rates undermines their usefulness by introducing noisy signals into contract repricing and hedging.

### Subjects and keywords
- Subject: Banking, Credit, Credit risk, Financial institutions, Financial regulation and supervision, Financial services, Hedging, Interbank rates, Loans, Money
- Keywords: Credit, Credit risk, Europe, floating rate, Global, Hedging, Interbank rates, interest rate risk, interest-rate derivative, Loans, reference rate, Reference rates, risk tolerance, total utility, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2017/01/27/what-are-reference-rates-for-44592_