DEFINITION of Reykjavik Interbank Offered Rate - REIBOR
Reykjavik Interbank Offered Rate - REIBOR is the formal interbank market rate for short term loans at Icelandic commercial and savings banks. Similar to how most countries use the London Interbank Offered Rate (LIBOR) as the base rate for variable rate loans, Icelandic banks use REIBOR (plus a premium) as the basis for setting the rate on variable interest rate loans.
BREAKING DOWN Reykjavik Interbank Offered Rate - REIBOR
The REIBOR is applied almost exclusively to the borrowing of the Icelandic currency, the kronur. Market participants can make bids to the interbank market that extend overnight, one week, two weeks, three months, six months, nine months and one year. This incarnation of REIBOR is relatively new as it only formally began operating in 1998.
How REIBOR Is Set
The Central Bank of Iceland supervises the interbank foreign exchange market and the interbank market for krónur (REIBOR). The Bank intervenes in the interbank foreign exchange market and buys or sells krónur in exchange for euros. Every day, the Central Bank lists the official exchange rate of the Icelandic króna, as well as interest rates in the market for krónur. The Bank affects interest rates in the interbank market for krónur when it determines the interest rates on its transactions with financial institutions, the banked stated.
The Central Bank is a participant in the NASDAQ OMX trading system and keeps track of the securities market without supervising it. The bank is authorized to trade in the secondary bond market if it deems such trading consistent with its objectives.
Iceland is a small country and therefore REIBOR is generally used only in that country to establish rates. Iceland experienced a severe financial crisis of its own from 2008-2011 when mny world markets essentially came to a halt. The REIBOR rate at that time soared and commercial credit was unavailable.
With much of tIceland banks' capital being loaned outside of the country, Iceland became overly dependent on other countries' economies staying afloat and those countries' residents and businesses paying off their debt. Iceland's problems really began when it became a victim of poor currency trading rates, called carry rates. When currencies dropped in other markets, the Icelandic krona's value fell catastrophically. But for the average Icelander, rate hikes by the central bank caused mortgage rates to skyrocket, hitting a key interest rate of 18% in October of 2008, the highest level in Europe.
Iceland was at the brink of bankruptcy when the International Monetary Fund intervened with a bailout plan. It took the better part of a decade for the economy to come back to its pre-crisis levels.