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CRISIS AND PANIC 

Cost of Interbank Lending
As concerns about the health of bank counterparties spread, lending banks
demanded higher interest rates to compensate for the risk. The one-month LIBOR-
OIS spread measures the part of the interest rates banks paid other banks that is due
to this credit risk. Strains in the interbank lending markets appeared just after the
crisis began in 2007 and then peaked during the fall of 2008.
IN PERCENT, DAILY
4%

3

2

1

0
2005 2006 2007 2008 2009

NOTE: Chart shows the spread between the one-month London Interbank Offered Rate (LIBOR) and the
overnight index swap rate (OIS), both closely watched interest rates.
SOURCE: Bloomberg

Figure .


pended on those markets. “When the commercial paper market died, the biggest
corporations in America thought they were finished,” Harvey Miller, the bankruptcy
attorney for the Lehman estate, told the FCIC. 
Investors and uninsured depositors yanked tens of billions of dollars out of banks
whose real estate exposures might be debilitating (Washington Mutual, Wachovia) in
favor of those whose real estate exposures appeared manageable (Wells Fargo, JP Mor-
gan). Hedge funds withdrew tens of billions of dollars of assets held in custody at the re-
maining investment banks (Goldman Sachs, Morgan Stanley, and even Merrill Lynch,
as the just-announced Bank of America acquisition wouldn’t close for another three and
a half months) in favor of large commercial banks with prime brokerage businesses (JP
Morgan, Credit Suisse, Deutsche Bank), because the commercial banks had more di-
verse sources of liquidity than the investment banks as well as large bases of insured de-
posits. JP Morgan and BNY Mellon, the tri-party repo clearing banks, clamped down
on their intraday exposures, demanding more collateral than ever from the remaining
investment banks and other primary dealers. Many banks refused to lend to one an-
other; the cost of interbank lending rose to unprecedented levels (see figure .).