A Comparison of Libor to Other Measures of Bank Borrowing Costs

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