Which Dealers Borrowed from the Fed’s Lender-of-Last-Resort Facilities?

Viral Acharya, Michael Fleming, Warren Hrung and Asani Sarkar

No 20170510, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions—the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more. Our findings reinforce the importance of Bagehot’s principle that the lender-of-last resort should lend only against high-quality collateral and at a penalty rate so as to discourage unneeded or opportunistic borrowing.

Keywords: stigma; insolvency; central banking; illiquidity; Lender of last resort; crises (search for similar items in EconPapers)
JEL-codes: E5 G1 G2 H1 (search for similar items in EconPapers)
Date: 2017-05-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednls:87193

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