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Discount window stigma during the 2007–2008 financial crisis

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

Abstract

We provide empirical evidence for the existence, magnitude, and economic cost of stigma associated with banks borrowing from the Federal Reserve's Discount Window (DW) during the 2007–2008 financial crisis. We find that banks were willing to pay a premium of around 44 basis points (bps) across funding sources (126bps after the bankruptcy of Lehman Brothers) to avoid borrowing from the DW. DW stigma is economically relevant as it increased some banks' borrowing cost by 32bps of their pre-tax return on assets (ROA) during the crisis. The implications of our results for the provision of liquidity by central banks are discussed.

Suggested Citation

  • Armantier, Olivier & Ghysels, Eric & Sarkar, Asani & Shrader, Jeffrey, 2015. "Discount window stigma during the 2007–2008 financial crisis," Journal of Financial Economics, Elsevier, vol. 118(2), pages 317-335.
  • Handle: RePEc:eee:jfinec:v:118:y:2015:i:2:p:317-335
    DOI: 10.1016/j.jfineco.2015.08.006
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    More about this item

    Keywords

    Discount window; Term auction facility; Stigma; Crisis; Monetary policy;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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