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Journal of Financial Services Research

Erschienen in:

27.07.2023

Interest Received by Banks during the Financial Crisis: LIBOR vs Hypothetical SOFR Loans

verfasst von: Urban Jermann

Erschienen in: Journal of Financial Services Research | Ausgabe 2-3/2024

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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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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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Titel: Interest Received by Banks during the Financial Crisis: LIBOR vs Hypothetical SOFR Loans
verfasst von: Urban Jermann
Publikationsdatum: 27.07.2023
Verlag: Springer US
Erschienen in: Journal of Financial Services Research / Ausgabe 2-3/2024
Print ISSN: 0920-8550
Elektronische ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-023-00415-5

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