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Standing Facilities and Interbank Borrowing: Evidence from the Federal Reserve's New Discount Window

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  • Furfine, Craig
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    Abstract

    Standing facilities are designed to place an upper bound on the rates at which financial institutions lend to one another overnight, reducing the volatility of the overnight interest rate, typically the rate targeted by central banks. However, improper design of the facility might decrease a bank's incentive to participate actively in the interbank market. Thus, the mere availability of central-bank-provided credit may lead to its use being greater than what would be expected based on the characteristics of the interbank market. By contrast, however, banks may perceive a stigma from using such facilities, and thus borrow less than what one might expect, thereby reducing the facilities' effectiveness at reducing interest rate volatility. We develop a model demonstrating these two alternative implications of a standing facility. Empirical predictions of the model are then tested using data from the Federal Reserve's new primary credit facility and the US federal funds market. A comparison of data from before and after recent changes to the discount window suggests continued reluctance to borrow from the Federal Reserve. Copyright 2003 by Blackwell Publishers Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal International Finance.

    Volume (Year): 6 (2003)
    Issue (Month): 3 (Winter)
    Pages: 329-47

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    Handle: RePEc:bla:intfin:v:6:y:2003:i:3:p:329-47

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    Cited by:
    1. Adam Ashcraft & Hoyt Bleakley, 2006. "On the market discipline of informationally opaque firms: evidence from bank borrowers in the federal funds market," Staff Reports 257, Federal Reserve Bank of New York.
    2. Huberto Ennis & John Weinberg, . "Over-the-counter loans, adverse selection, and stigma in the interbank market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    3. Nautz, Dieter & Schmidt, Sandra, 2009. "Monetary policy implementation and the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1274-1284, July.

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