Liquidity from Two Lending Facilities

Sriya Anbil and Angela Vossmeyer
Additional contact information
Sriya Anbil: https://www.federalreserve.gov/econres/sriya-l-anbil.htm

No 2017-117, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: During financial crises, the lender of last resort (LOLR) uses lending facilities to inject critical funding into the banking sector. The facilities need to be designed in such a way that banks are not reluctant to seek assistance due to stigma and that banks with liquidity concerns are attracted rather than those prone to risk-taking and moral hazard incentives. We use an unexpected disclosure that introduced stigma at one of two similar LOLRs during the Great Depression to evaluate whether banks used LOLR assistance to improve their liquidity needs using a novel trivariate model with recursive endogeneity. We find evidence that banks that approached the facility with stigma were less liquid and reduced their position of safe assets in comparison with banks that approached the facility with no stigma. Thus, stigma forced the pool of LOLR borrowers to separate into different groups of banks that ex-post revealed their liquidity preferences. This finding sheds light on why and when banks approach their LOLR.

Keywords: Banks; credit unions; other financial institutions; Great Depression; Lender of last resort; Liquidity; Stigma (search for similar items in EconPapers)
JEL-codes: G01 G18 G21 N22 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2017-12-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2017117pap.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-117

DOI: 10.17016/FEDS.2017.117

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().