We investigate the determinants of five major currency Libor–OIS spread changes during the long run and interbank market distress periods. Consistent with recent studies, we find that systemic credit and counter party risks, market liquidity, and volatility are spread determinants. However, the impact and relevance of these determinants change, depending on the stages of the interbank market crisis. We show that commercial bank leverage and the state of the economy are additional spread drivers. We also discover that the key USD spread is strongly related to banks' risk tolerance levels, capital concerns, and secondary market liquidity during the crisis, even after controlling for other factors.
- Bank risk fundamentals
- Banking system leverage
- Credit and counterparty risks
- Libor–OIS spread change determinants
- Market liquidity and volatility
- State of the economy