What is the precise role of reference rates? Why does it matter if LIBOR was manipulated? To
address these questions, I analyze the use of reference rates in floating-rate loans and interestrate
derivatives in the context of lending relationships. I develop a simple framework
combining maturity transformation with three key frictions which generate meaningful funding
risk and a rationale for risk management. Reference rates like LIBOR mitigate contractual
incompleteness, facilitating management of funding risk. As bank funding costs move with
bank credit risk, it makes sense for the reference rate to have a bank credit risk component.
Manipulation can add noise, reducing the usefulness of reference rates for this purpose.