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Credit Risk, Liquidity, and Lies

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  • Thomas B. King

    (Federal Reserve Bank of Chicago)

  • Kurt F. Lewis

    (Federal Reserve Board)

Abstract

We examine the relative effects of credit risk and liquidity in the interbank market using bank-level panel data on LIBOR submissions and CDS spreads, allowing for the possibility that LIBOR-submitting firms may strategically misreport their funding costs. We find that interbank spreads were very sensitive to credit risk at the peak of the crisis. However, liquidity premiums constitute the bulk of those spreads on average, and Federal Reserve interventions coincide with improvements in liquidity at short maturities. Accounting for misreporting, which is large at times, is important for obtaining these results.

Suggested Citation

  • Thomas B. King & Kurt F. Lewis, 2020. "Credit Risk, Liquidity, and Lies," International Journal of Central Banking, International Journal of Central Banking, vol. 16(5), pages 219-267, October.
    • Handle: RePEc:ijc:ijcjou:y:2020:q:4:a:6
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    Cited by:

    1. David Skovmand & Jacob Bjerre Skov, 2022. "Decomposing LIBOR in Transition: Evidence from the Futures Markets," Papers 2201.06930, arXiv.org, revised Mar 2022.
    2. Chen, Jiakai, 2021. "LIBOR's poker," Journal of Financial Markets, Elsevier, vol. 55(C).

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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
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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