Today I read a case study on the events leading up to the Lehman Brothers bankruptcy. The case cited the record level of the TED Spread at that time as a measure of interbank credit risk. So what is it – and is it still relevant?
- TED Spread = 3 month Libor (interbank lending) less 3 month T-bill rate (US Gov)
- Indicative of credit risk and perceived health of the banking system
- Values consistently above 50bps are relatively high (reached 4.5% after Lehman)
- The spread has trended gradually higher throughout 2016 (now above 50bps)
- WSJ article cites impact of new money market fund regulations as a factor
- The spread still remains a relevant indicator of interbank liquidity and risk
Sources and links for reference: