LIBOR is not just an interest rate. It is an interest rate benchmark, or reference rate, one that plays a central role in financial markets and our economy. But there are doubts about LIBOR’s reliability, prompting the Federal Reserve and the Office of Financial Research (OFR) to work with other agencies and market participants to devise a reliable, widely accepted alternative.
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ARRC has narrowed the list of potential alternatives to two: A secured repurchase agreement (repo) rate and an unsecured rate, the Overnight Bank Funding Rate. A repo is essentially a collateralized, or secured, loan when one party sells a security to another party with an agreement to repurchase it later at an agreed price. Published by the Federal Reserve Bank of New York, the Overnight Bank Funding Rate is a broad, widely accepted measure of the cost of funds for U.S. banks based on the federal funds rate and those on overnight Eurodollar deposits.
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