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Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies

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  • Zhang, Hanzhe

    (Michigan State University, Department of Economics)

  • Hu, Yunzhi

    (Kenan-Flagler Business School, University of North Carolina)

Abstract

How should the government effectively provide liquidity to banks during periods of financial distress? During the 2008-2010 crisis, banks avoided borrowing from the Fed’s long-standing discount window (DW), but actively participated in its special monetary program, the TermAuction Facility (TAF), although both programs had the same borrowing requirements. Us-ing an adverse selection model with endogenous borrowing decisions, we explain why two programs suffer from different stigma and how the introduction of TAF incentivized banks’ borrowing. Empirically, we combine several data sources to confirm the theoretical prediction that weaker banks borrowed relatively more from the DW.

Suggested Citation

  • Zhang, Hanzhe & Hu, Yunzhi, 2020. "Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies," Working Papers 2020-7, Michigan State University, Department of Economics.
    • Handle: RePEc:ris:msuecw:2020_007
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    Cited by:

    1. Zhang, Hanzhe, 2021. "The optimal sequence of prices and auctions," European Economic Review, Elsevier, vol. 133(C).
    2. Hanzhe Zhang, 2021. "Prices versus auctions in large markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(4), pages 1297-1337, November.

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    More about this item

    Keywords

    lending of last resort; discount window stigma; Term Auction Facility; adverse selection;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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