Working Paper: NBER ID: w29614
Authors: Urban Jermann
Abstract: The credit sensitivity of LIBOR helped lenders during the financial crisis. SOFR is not credit-sensitive and would not have provided that support. The cumulative additional interest from LIBOR during the crisis is estimated to be between 1% to 2% of the notional amount of outstanding loans, depending on the tenor and type of SOFR rate used. The amount of LIBOR business loans owned by banks could have been as high as about 2trn, and the overall additional interest income banks received thanks to LIBOR could have been as high as 30bn dollars. The analysis also shows that a compounded SOFR reduces insurance relative to a term SOFR.
Keywords: LIBOR; SOFR; Financial Crisis
JEL Codes: E43; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| LIBOR's credit sensitivity (E43) | lenders' income (G21) |
| LIBOR's credit sensitivity (E43) | additional income on outstanding loans (G51) |
| SOFR loans (G21) | lower interest income for banks (G21) |
| transition to SOFR (G19) | adverse consequences for bank balance sheets (F65) |
| compounded SOFR (G19) | faster declines in interest payments (E43) |