Credit Risk, Liquidity and Lies
Thomas King and
Kurt Lewis ()
No 2015-112, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)
We reexamine the relative effects of credit risk and liquidity in the interbank market using bank-level panel data on Libor submissions and CDS spreads. Our model synthesizes previous work by combining the fundamental determinants of interbank spreads with the effects of strategic misreporting by Libor-submitting firms. We find that interbank spreads were very sensitive to credit risk at the peak of the crisis. However, liquidity premia 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.
Keywords: Bank Funding; Credit Risk; LIBOR; Liquidity; Misreporting (search for similar items in EconPapers)
JEL-codes: E43 G21 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
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