Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/130674 
Year of Publication: 
2014
Series/Report no.: 
Working Paper No. 2014-23
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
We use matched, bank-level panel data on Libor submissions and credit default swaps to decompose bank-funding spreads at several maturities into components reflecting counterparty credit risk and funding-market liquidity. To account for the possibility that banks may strategically misreport their funding rates in the Libor survey, we nest our decomposition within a model of the costs and benefits of lying. We find that Libor spreads typically consist mostly of a liquidity premium and that this premium declined at short maturities following Federal Reserve interventions in bank funding markets. At longer maturities, credit risk explains much of the time variation in Libor, reflecting in part fluctuations in the degree to which default risk is priced in the interbank market. Our results are consistent with banks both under- and over-reporting their funding costs during the crisis but suggest that the incidence of this behavior may have subsequently declined.
Subjects: 
LIBOR
Liquidity
Credit Risk
Misreporting
Document Type: 
Working Paper

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