The Growing Reluctance To Borrow At The Discount Window: An Empirical Investigation

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The Growing Reluctance To Borrow At The Discount Window: An Empirical Investigation

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Stavros Peristiani

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Stavros Peristiani

Abstract

Federal Reserve Regulation A imposes formal guidelines on borrowing from the discount window and ensures that the facility is used for appropriate purposes. In a way, this regulation imposes a nonprice mechanism that compels depository institutions to be more prudent in exercising their borrowing privileges. In the 1980s, however, banks became increasingly more reluctant to borrow adjustment credit from the discount window. This behavior is puzzling because discount window guidelines have not changed. This paper investigates the reasons behind the weakened demand for borrowed reserves. Our empirical findings suggest that the growing reluctance to borrow stems from the deteriorating financial position of banks during this period. In particular, banks avoided the discount window because they feared that market participants might have interpreted their visits as a signal of serious funding difficulties. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 80 (1998)
Issue (Month): 4 (November)
Pages: 611-620
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Handle: RePEc:tpr:restat:v:80:y:1998:i:4:p:611-620

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Other versions:
- Bartolini, Leonardo & Prati, Alessandro, 2006. "Cross-country differences in monetary policy execution and money market rates' volatility," European Economic Review, Elsevier, vol. 50(2), pages 349-376, February. [Downloadable!] (restricted)
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Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "The Overnight Interbank Market: Evidence from the G7 and the Euro Zone," CEPR Discussion Papers 3090, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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- Alessandro Prati & Leonardo Bartolini & Giuseppe Bertola, 2001. "The overnight interbank market: evidence from the G-7 and the Euro zone," Staff Reports 135, Federal Reserve Bank of New York. [Downloadable!]
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Leonardo Bartolini & Giuseppe Bertoli & Alessandro Prati, 2000. "Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention," Econometric Society World Congress 2000 Contributed Papers 0123, Econometric Society. [Downloadable!]
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- Alessandro Prati & Leonardo Bartolini & Giuseppe Bertola, 2000. "Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention," IMF Working Papers 00/163, International Monetary Fund.
- Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2001. "Banks' reserve management, transaction costs, and the timing of Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1287-1317, July. [Downloadable!] (restricted)

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