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A cautionary tale of two extremes: The provision of government liquidity support in the banking sector

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  • Bui, Christina
  • Scheule, Harald
  • Wu, Eliza

Abstract

Using U.S. bank holding company data, we study the impact of the crisis liquidity programs initiated by the U.S. Federal Reserve on bank-specific information production. We find empirical evidence that following the receipt of liquidity support there was a pervasive decrease in bank stock price informativeness that increased market synchronicity and crash risk. Our findings further suggest that these effects are mainly driven by bank participation in the Discount Window (DW) and Term Auction Facility (TAF) programs. On the bright side, we confirm that the liquidity programs served their purpose in targeting and supporting illiquid banks with low core stable funding sources through the crisis.

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  • Bui, Christina & Scheule, Harald & Wu, Eliza, 2020. "A cautionary tale of two extremes: The provision of government liquidity support in the banking sector," Journal of Financial Stability, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finsta:v:51:y:2020:i:c:s1572308920300838
    DOI: 10.1016/j.jfs.2020.100784
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    More about this item

    Keywords

    Bank crash risk; Crisis liquidity programs; Bank liquidity; Market discipline; Stock return synchronicity;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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