The Cost of Bank Loans in Relation to Bonds Swapped into a Floating Rate

Banks never lend at less than the interbank floating rate, LIBOR. We argue that this must be because it is insufficiently profitable for those which could lend at less than LIBOR to do so and discuss circumstances in which this would be the case. Using data from 1988-91, we show that LIBOR varies in relation to the cost of corporate bonds swapped into a floating rate, and suggest that the relative cost of LIBOR may affect bank and bond market pricing policies. The data also indicates that changes in the compensation for credit risk demanded by the bank and bond markets are not synchronous, and that swap rates have an appreciable impact on the cost of bonds swapped into floating