Is There Stigma to Discount Window Borrowing?

Olivier Armantier, Eric Ghysels (), Asani Sarkar and Jeffrey Shrader

No 20110831, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The Federal Reserve employs the discount window (DW) to provide funding to fundamentally solvent but illiquid banks (see the March 30 post “Why Do Central Banks Have Discount Windows?”). Historically, however, there has been a low level of DW use by banks, even when they are faced with severe liquidity shortages, raising the possibility of a stigma attached to DW borrowing. If DW stigma exists, it is likely to inhibit the Fed’s ability to act as lender of last resort and prod banks to turn to more expensive sources of financing when they can least afford it. In this post, we provide evidence that during the recent financial crisis banks were willing to pay higher interest rates in order to avoid going to the DW, a pattern of behavior consistent with stigma.

Keywords: Fed; transparency; bank borrowing; stigma; financial crisis; Term Auction Facility (TAF); Discount window (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2011-08-31
New Economics Papers: this item is included in nep-mon
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