Cleveland, OH (PRWEB) October 11, 2012
Libor served as a reliable, low-risk benchmark for adjustable rate mortgages (ARMs) until the financial crisis, when Libor diverged sharply from other similar short-term rates.
Looking at alternatives to Libor, Federal Reserve Bank of Cleveland researchers Mark Schweitzer and Guhan Venkatu say the one-year Treasury rate and the six-month rate on overnight indexed swaps (OIS) are strong candidates as reference rates for consumer loans.
Both are market-determined rates, and neither revealed any meaningful counterparty credit risk during the financial crisis.
Schweitzer and Venkatu estimated the impact that these alternatives would have had on consumers if they had been the reference rates on loans originated on or before July 2008.
They found that, over the subsequent four-year period, "The alternative indexes would have delivered average savings over Libor of about $25 to $45 per month, and substantially more for mortgages that reset in October 2008," when Libor diverged sharply from similar rates.
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