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Stigma in financial markets: evidence from liquidity auctions and discount window borrowing during the crisis

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Author Info

  • Olivier Armantier
  • Eric Ghysels
  • Asani Sarkar
  • Jeffrey Shrader

Abstract

We provide empirical evidence for the existence, magnitude, and economic impact of stigma associated with banks borrowing from the Federal Reserve’s discount window facility. We find that, during the height of the financial crisis, banks were willing to pay an average premium of at least 37 basis points (and 150 basis points after Lehman’s bankruptcy) to borrow from the Term Auction Facility rather than from the discount window. The incidence of stigma varied according to bank characteristics and market conditions. Finally, we find that discount window stigma is economically relevant since it increased banks’ borrowing costs during the crisis. Our results have important implications for the provision of liquidity by central banks.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 483.

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Date of creation: 2011
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Handle: RePEc:fip:fednsr:483

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Related research

Keywords: Discount window ; Financial crises ; Monetary policy ; Bank liquidity ; Banks and banking - Costs ; Auctions;

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References

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  1. Stavros Peristiani, 1998. "The Growing Reluctance To Borrow At The Discount Window: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 611-620, November.
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Citations

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Cited by:
  1. Stefano Puddu & Andreas Waelchli, 2011. "Too TAF Towards the Risk," IRENE Working Papers 11-01, IRENE Institute of Economic Research.
  2. Scott Brave & Hesna Genay, 2011. "Federal Reserve policies and financial market conditions during the crisis," Working Paper Series WP-2011-04, Federal Reserve Bank of Chicago.
  3. Su-Hsin Chang & Silvio Contessi & Johanna L. Francis, 2013. "Understanding the accumulation of bank and thrift reserves during the U.S. financial crisis," Working Papers 2013-029, Federal Reserve Bank of St. Louis.
  4. Acharya, Viral V & Merrouche, Ouarda, 2012. "Precautionary hoarding of liquidity and inter-bank markets: Evidence from the sub-prime crisis," CEPR Discussion Papers 8859, C.E.P.R. Discussion Papers.
  5. Colignatus, Thomas, 2011. "Conditions for turning the ex ante risk premium into an ex post redemption for EU government debt," MPRA Paper 34816, University Library of Munich, Germany, revised 17 Nov 2011.
  6. Gary Gorton, 2013. "The Development of Opacity in U.S. Banking," NBER Working Papers 19540, National Bureau of Economic Research, Inc.

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