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What are reference rates for?

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  • Kirti, Divya

Abstract

Reference rates like LIBOR were designed to reflect banks’ full cost of funds, including credit premia. With publication of LIBOR expected to cease soon, regulators have recommended a shift to risk-free reference rates. To study the implications of this shift, this paper develops a tractable model of bank lending and hedging in which the design of reference rates shapes the allocation of risk in equilibrium. Reference rates that capture credit risk, but are sufficiently free from manipulation, could improve welfare relative to risk-free reference rates. It remains an open question whether such reference rates can be constructed.

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  • Kirti, Divya, 2022. "What are reference rates for?," Journal of Banking & Finance, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:jbfina:v:144:y:2022:i:c:s0378426622002151
    DOI: 10.1016/j.jbankfin.2022.106635
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    Cited by:

    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. Mielus Piotr, 2019. "How to Measure the Economic Integrity of Ibor Panels? A Behavioural Approach," Financial Sciences. Nauki o Finansach, Sciendo, vol. 24(1), pages 51-73, March.
    3. Sven Klingler & Olav Syrstad, 2023. "Does SOFR-linked debt cost borrowers more than LIBOR-linked debt?," Working Paper 2023/7, Norges Bank.

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    More about this item

    Keywords

    Reference rates; IBORs; RFRs; Interest-rate risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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