A Comparison of Libor to Other Measures of Bank Borrowing Costs

47 Pages Posted: 16 Nov 2018

See all articles by Dennis Kuo

Dennis Kuo

University of California, Los Angeles (UCLA)

David R. Skeie

University of Warwick - Warwick Business School

James I. Vickery

Federal Reserve Bank of New York

Date Written: April 2018

Abstract

Although regulatory and legal investigations have found that Libor was misreported by some banks during the financial crisis, there is limited evidence of how well Libor overall represented bank funding conditions during this period. We compare the survey-based Libor to several alternative measures of short-term bank funding costs, including bids at the Federal Reserve Term Auction Facility, inferences of term borrowing from Fedwire payments, and the New York Funding Rate. We find that Libor broadly tracks these alternative measures during 2007-09. However, Libor lies below these other measures, by up to 20-30 basis points at the height of the crisis, which we interpret as being consistent with banks understating their borrowing costs due to stigma. We also find a very large dispersion in bank borrowing costs, not reflected by Libor, highlighting the potential basis risk associated with contracts indexed to market-wide funding costs during periods of financial distress.

Keywords: Libor, Financial Crisis, Stigma, Misreporting, Interbank Markets

Suggested Citation

Kuo, Dennis and Skeie, David R. and Vickery, James Ian, A Comparison of Libor to Other Measures of Bank Borrowing Costs (April 2018). Available at SSRN: https://ssrn.com/abstract=3272370 or http://dx.doi.org/10.2139/ssrn.3272370

Dennis Kuo

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

David R. Skeie (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://www.wbs.ac.uk/about/person/david-skeie

James Ian Vickery

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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