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Interest Received by Banks during the Financial Crisis: LIBOR vs Hypothetical SOFR Loans

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  • 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.

Suggested Citation

  • Urban Jermann, 2021. "Interest Received by Banks during the Financial Crisis: LIBOR vs Hypothetical SOFR Loans," NBER Working Papers 29614, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29614
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    References listed on IDEAS

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    1. Antje Berndt & Darrell Duffie & Yichao Zhu, 2023. "Across‐the‐Curve Credit Spread Indices," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 32(3), pages 115-130, August.
    2. Darrell Duffie & Cooperman Harry & Stephan Luck & Zachry Wang & Yilin Yang, 2022. "Bank Funding Risk, Reference Rates, and Credit Supply," Staff Reports 1042, Federal Reserve Bank of New York.
    3. Rustom M Irani & Rajkamal Iyer & Ralf R Meisenzahl & José-Luis Peydró, 2021. "The Rise of Shadow Banking: Evidence from Capital Regulation [Securities trading by banks and credit supply: Micro-evidence from the crisis]," The Review of Financial Studies, Society for Financial Studies, vol. 34(5), pages 2181-2235.
    4. Darrell Duffie & Jeremy C. Stein, 2015. "Reforming LIBOR and Other Financial Market Benchmarks," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 191-212, Spring.
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    1. Darrell Duffie & Cooperman Harry & Stephan Luck & Zachry Wang & Yilin Yang, 2022. "Bank Funding Risk, Reference Rates, and Credit Supply," Staff Reports 1042, Federal Reserve Bank of New York.
    2. Antje Berndt & Darrell Duffie & Yichao Zhu, 2023. "Across‐the‐Curve Credit Spread Indices," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 32(3), pages 115-130, August.
    3. Indriawan, Ivan & Jiao, Feng & Tse, Yiuman, 2022. "Price discovery between forward-looking SOFR and LIBOR," Finance Research Letters, Elsevier, vol. 47(PB).

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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