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15/02/2025

What is AMERIBOR?

AMERIBOR stands for the American Interbank Offered Rate. It is a benchmark interest rate developed by the American Financial Exchange (AFX), now part of Intercontinental Exchange, Inc. (NYSE:ICE), to reflect borrowing costs for unsecured loans within the US financial system.

Primarily used by regional, community, and mid-sized banks, AMERIBOR serves as an alternative to LIBOR and complements other rates like SOFR (Secured Overnight Financing Rate).

Designed for transparency and efficiency, AMERIBOR is rooted in real-world, market-driven transactions on the AFX platform, ensuring accuracy and reliability for market participants.

Key Points

    • Full Name: American Interbank Offered Rate.
    • Developer: American Financial Exchange (AFX), launched in 2015.
    • Purpose: Provides a benchmark rate for US regional and community banks.
    • Scope: Based on actual interbank lending activity, making it a transparent, real-time rate.
    • Post-LIBOR Role: A crucial alternative for institutions underserved by SOFR or other benchmarks.

How AMERIBOR works

AMERIBOR reflects the interest rates at which US banks and financial institutions borrow funds overnight on an unsecured basis. Its value is calculated as a volume-weighted average of eligible loans traded on the AFX electronic marketplace.

Key features of AMERIBOR’s methodology:

  • Transactions: Derived from actual overnight interbank loans.
  • Transparency: Based on real trades rather than estimates or panel submissions.
  • Unsecured: Captures the credit risk of lending without collateral.

The AFX platform facilitates trading between participants, ensuring AMERIBOR is representative of prevailing market conditions.

Why was AMERIBOR introduced?

AMERIBOR was developed to meet the needs of regional and community banks that play a critical role in lending to small businesses and consumers across the United States. Unlike SOFR, which is based on secured repo transactions and primarily suits larger institutions, AMERIBOR reflects unsecured borrowing costs for smaller, relationship-driven lenders.

Key benefits:

  • Transparency: AMERIBOR uses market-driven data from real trades.
  • Relevance: Aligns with the funding models of regional banks and lenders.
  • Diversity: Offers an alternative to SOFR, supporting a broader range of institutions post-LIBOR.

By providing a credible benchmark, AMERIBOR allows financial institutions to price loans, deposits, and other products accurately.

Calculation Example

The following example illustrates how AMERIBOR is calculated based on transactions executed on a single day:

Trade Time Volume (USD) Interest Rate (%)
10:00 AM $10,000,000 3.25
12:00 PM $15,000,000 3.30
15:00 PM $25,000,000 3.28

The AMERIBOR Rate is the weighted average of these trades, calculated as:

AMERIBOR=
(10M×3.25)+(15M×3.30)+(25M×3.28)
10,000,000+15,000,000+25,000,000

AMERIBOR = 3.28%

AMERIBOR vs. Other benchmark rates

The table below highlights the differences between AMERIBOR, SOFR, and LIBOR:

Feature AMERIBOR SOFR LIBOR
Basis Unsecured interbank loans Secured repo market Bank panel submissions
Secured / Unsecured Unsecured Secured Unsecured
Transparency High High Medium
Participants Regional banks Large institutions Global banks
Adoption US-focused Widely used globally Phased out in 2023

Advantages and disadvantages of AMERIBOR

Advantages:

Market-Based: Reflects actual borrowing activity rather than theoretical estimates.

Tailored for Smaller Institutions: Aligns with funding practices of regional banks.

Complementary to SOFR: Offers an unsecured benchmark alongside SOFR’s secured rate.

Disadvantages:

Liquidity Concerns: AMERIBOR has lower trading volume compared to SOFR.

Limited Adoption: Primarily used by US-based regional banks; less adoption globally.

Real-world applications of AMERIBOR

AMERIBOR is primarily used by community banks and mid-sized lenders for pricing loans, deposits, and other financial products.

Example:

A regional bank issues a commercial loan tied to AMERIBOR:

  • Loan Structure: AMERIBOR + 200 basis points (2.00%).
  • Current AMERIBOR Rate: 3.28%.
  • Loan Rate: 3.28% + 2.00% = 5.28%.

This structure ensures borrowers and lenders have a clear, transparent benchmark aligned with the market.

Frequently Asked Questions

  1. How does AMERIBOR differ from SOFR?AMERIBOR reflects unsecured interbank loans, while SOFR is based on secured repo transactions. AMERIBOR is more relevant for smaller banks, whereas SOFR is widely adopted by larger institutions.
  2. Is AMERIBOR suitable for all financial institutions?AMERIBOR primarily serves US regional and community banks. Institutions requiring secured rates or operating globally may prefer SOFR or other benchmarks.
  3. What sectors rely most on AMERIBOR?
    Sectors involving relationship-based lending, such as small business loans, benefit most from AMERIBOR’s unsecured structure.

Conclusion

AMERIBOR is an essential benchmark rate developed to meet the needs of regional and community banks in the United States. As a transparent, market-driven rate, it reflects unsecured interbank borrowing activity, making it a reliable alternative to LIBOR for smaller institutions.

In the post-LIBOR era, AMERIBOR offers a valuable tool alongside SOFR, ensuring a diverse and robust benchmark ecosystem tailored to various financial markets.

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