SOFR Academy Welcomes the Publication of a New Paper by Leading Researchers at the Stanford Graduate School of Business and the Federal Reserve Bank of New York
SOFR Academy, Inc., a digital education and market information provider, welcomed the publication of new research by leading researchers at the Stanford Graduate School of Business and the Federal Reserve Bank of New York on Bank Funding Risk, Reference Rates, and Credit Supply.
Samim Ghamami, senior advisor at SOFR Academy, senior researcher and adjunct professor of finance at New York University, and a senior researcher at UC Berkeley Center for Risk Management Research and the Department of Economics said, “The paper analyzes the impact of the transition from LIBOR to SOFR on the supply of revolving credit lines and the associated drawdown risk. The authors show that the transition leads to heavier drawdowns during times of distress, which could ultimately have welfare loss implications. The results reinforce the fact that a robust and well-designed credit-sensitive spread like AXI can mitigate the unintended adverse impact of LIBOR transition on the credit channel.”
The new research uses confidential bank-level balance sheet data from the Federal Reserve —designed to monitor the liquidity profile of large US Banks Holding Companies (BHC)— allowing the authors to break down the composition and dynamics of their funding costs in much more detail than was previously possible. The research shows that corporate credit lines are drawn more heavily when funding markets are more stressed, and that at the end of 2019 the largest twenty banks had amassed approximately $1.3 trillion of undrawn credit line commitments.
Marcus A. Burnett, CEO of SOFR Academy said, “The provision of credit across the United States economy, including in time of market stress, enables firms to weather disruptions in their business and helps maintain price stability. We welcome this new and independent research which confirms the asset – liability mismatch problem that the collection of large US banks are concerned about. Importantly, the paper shows that a credit spread supplement to SOFR reduces the cost for borrowers of obtaining credit lines from banks.”
“The results reinforce the fact that a robust and well-designed credit-sensitive spread like AXI can mitigate the unintended adverse impact of LIBOR transition on the credit channel ”– Samim Ghamami, senior advisor at SOFR Academy
“Bank Funding Risk, Reference Rates, and Credit Supply” by Harry Cooperman, and Darrell J. Duffie, Stephan Luck, Zachry Wang, and Yilin (David) Yang, is accessible via the New York Fed’s website here and a PDF version is available for download here. SOFR Academy, Inc. has had no involvement in the development of this research.
About SOFR Academy
SOFR Academy, Inc. provides financial education and market information to empower corporations, financial institutions, governments, and individuals to make better decisions. The Firm’s panel of advisors includes academics from the Harvard University, the University of Oxford, London Business School, the University of California Berkeley, New York University and Tsinghua University, as well as experienced financial market practitioners. SOFR Academy is a member of the Asia Pacific Loan Market Association (APLMA), American Economic Association (AEA), the Loan Syndications and Trading Association (LSTA), the International Swaps and Derivatives Association (ISDA), the Bankers Association for Finance and Trade (BAFT) which is a wholly owned subsidiary of the American Bankers Association (ABA), the U.S. Chamber of Commerce (USCC), and the Bretton Woods Committee (BWC). For more information please visit SOFR.org.