October 2020 issue contents
Credit Risk, Liquidity, and Lies

Thomas B. Kinga and Kurt F. Lewisb


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.

JEL Codes: E43, G21, L14.

Full article (PDF, 49 pages, 1,915 kb)


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