For instance, see the graphs below.

Before the 2008 financial crisis, they were extremely close to zero. Why is that so?

enter image description here enter image description here


  • 3
    $\begingroup$ bis.org/publ/qtrpdf/r_qt1609e.htm $\endgroup$ May 21, 2021 at 8:50
  • 2
    $\begingroup$ The music was on and everyone was dancing! $\endgroup$ May 21, 2021 at 11:19
  • $\begingroup$ See also: papers.ssrn.com/sol3/papers.cfm?abstract_id=2879904. $\endgroup$
    – fes
    May 21, 2021 at 13:15
  • $\begingroup$ @DaneelOlivaw I understand that funding cost can explain what happens after the financial crisis. But funding cost is not zero, why should the basis (at least the short maturities) be zero? $\endgroup$ May 21, 2021 at 15:19
  • $\begingroup$ @fesman please see my response to Daneel Olivaw? The same question applies to your reference. Thanks! $\endgroup$ May 21, 2021 at 15:21

1 Answer 1


The way I rationalize it is to consider the different meaning for what Libor was pre and post the GFC. Pre the GFC, Libor was the price of USD for European banks. They are structurally short USD and long either GBP or EUR. The instrument of choice for funding this shortage was the FX swap market. This relationship bled into the perceived cost of funding USD and thus the basis had to be close to 0 almost a priori. What is nice with this explanation is it explains why emerging currency basis was never zero, the cost of USD for non-European tier one banks has never been Libor and thus had to be non-zero. What the GFC showed was that Libor was not the cost of funding for any bank, and breaking that relationship (but quoting basis as floating libor vs floating other) meant that basis had to become material.

  • $\begingroup$ I like your argument. But can you please explain what you mean by "the relationship bled into the perceived cost of funding USD", especially what you mean by "bled into". Is it in the sense that people did not distinguish between two closely related ideas. $\endgroup$
    – nbbo2
    May 23, 2021 at 0:38
  • $\begingroup$ What is your take on my question in the comments: does the basis imply opportunities for "long only" investors to transfer their money market investments to better yielding currencies? $\endgroup$
    – fes
    May 23, 2021 at 7:40
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    $\begingroup$ @noob2 The easiest example of "bled into" would be what happened to the Johannesburg Interbank Average Rate (JIBAR) where foreign banks had to eventually be excluded as contributing members as they were contributing the implied ZAR rate from the short term FX market as their contributions for ZAR funding as that was their cost of funds. This is a rather explicit example though. $\endgroup$
    – river_rat
    May 23, 2021 at 22:07
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    $\begingroup$ @fesman If you have the ability to monetize the "arbitrage" then you should (and a lot of financial institutions do - especially by issuing eurobonds in high basis currencies to realize cheap funding in their own accounting currencies.) $\endgroup$
    – river_rat
    May 23, 2021 at 22:22

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