What are reference rates for?

Divya Kirti

Journal of Banking & Finance, 2022, vol. 144, issue C

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.

Keywords: Reference rates; IBORs; RFRs; Interest-rate risk (search for similar items in EconPapers)
JEL-codes: G18 G21 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: What Are Reference Rates For? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:144:y:2022:i:c:s0378426622002151

DOI: 10.1016/j.jbankfin.2022.106635

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