A Case for AXI
Abstract
In the LIBOR era, banks routinely tied revolving credit facilities to credit-sensitive benchmarks. This study assesses the Across-the-Curve Credit Spread Index (AXI) -- a transparent, transaction-based measure of wholesale bank funding costs -- as a complement to SOFR, summarizing its behavior, construction, and loan-pricing implications. AXI aggregates observable unsecured funding transactions across short- and long-term maturities to produce a daily credit spread that is IOSCO-aligned and operationally compatible with SOFR-based infrastructure. The Financial Conditions Credit Spread Index (FXI) is a broader market companion to AXI and serves as its fallback. FXI co-moves closely with AXI in normal times; under stress, the correlation of daily changes exceeds 0.9 for economy-wide shocks and remains strong in bank-specific stress, around 0.8 during the Silicon Valley Bank episode. Empirically, AXI is strongly correlated with standard credit-spread measures and market-stress indicators and is inversely related to financial-sector performance. SOFR+AXI exhibits correlations with macroeconomic variables with the signs and magnitudes expected of a credit-sensitive rate. In loan-pricing applications, SOFR+AXI reduces funding risk and can support spread discounts of up to 65 basis points without lowering risk-adjusted returns. In stress scenarios, banks relying on SOFR-only pricing can fail to recover as much as 15 basis points on revolving credit lines over as little as three months. Taken together, AXI restores the credit sensitivity lost in the USD LIBOR transition while avoiding reliance on thin short-term markets, delivering significant economic value.