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.
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Notes
In particular, the compounded rate is.
$${O}_{t}=\left(\frac{365}{N}\right)\times \left({\prod }_{j=t}^{t+N-1}\left(1+\frac{{O}_{j}^{d}}{360}\right)-1\right),$$where N equals either 30 or 91, and \(O_j^d\) is the overnight rate at date j.
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Acknowledgements
I am grateful for comments from Darrell Duffie, Andrei Magasiner, Michael Roberts and Michael Schwert.
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Jermann, U. Interest Received by Banks during the Financial Crisis: LIBOR vs Hypothetical SOFR Loans. J Financ Serv Res (2023). https://doi.org/10.1007/s10693-023-00415-5
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DOI: https://doi.org/10.1007/s10693-023-00415-5