Member Spotlight

Unintended Impact of LIBOR-SOFR Transition on Credit Markets and Economic Activity

SOFR Academy  | Mon, Mar 27, 2023


According to Samim Ghamami of BWC member SOFR Academy, credit market stress has macroeconomic consequences. In this SOFR Academy Research Note, Ghamami shows that LIBOR-SOFR transition might worsen these macroeconomic consequences.

Bank credit line commitments have increased significantly since the 2007-09 global financial crisis. While large corporate credit lines have become a dominant form of bank lending, small to medium-sized enterprises (SMEs) continue to rely on term loans. During periods of stress, credit lines linked to SOFR could experience significantly higher drawdown quantities than LIBOR-linked credit lines. Ghamami argues that this could exacerbate the counterintuitive dynamic where aggregate bank lending could grow while aggregate firm investment could drop during stress episodes. Underlying the boost in aggregate credit growth could be a term loan crunch with adverse impact on SMEs.

In short, the LIBOR-SOFR transition could increase credit market frictions and worsen the subsequent macroeconomic consequences. Ghamami shows that sustainable credit benchmarks could help counteract some of these consequences.

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