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Discipline and liquidity in the market for federal funds

  • Thomas B. King
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    I find that high-risk banks pay more for federal funds and are less likely to utilize them as a source of liquidity. The extent of this discipline has risen in recent years, following legislation designed to impose more of the costs of bank failure on uninsured creditors. However, the risk-pricing remains imperfect, and additional results suggest that information problems persist in the fed-funds market. The findings have implications for interest-rate determination, risk contagion in the financial system, the use of market data in banking supervision, and recent efforts to reform Discount Window operations.

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    Paper provided by Federal Reserve Bank of St. Louis in its series Supervisory Policy Analysis Working Papers with number 2003-02.

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    Date of creation: 2003
    Date of revision:
    Handle: RePEc:fip:fedlsp:2003-02
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    1. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
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    17. Ho, Thomas S Y & Saunders, Anthony, 1985. " A Micro Model of the Federal Funds Market," Journal of Finance, American Finance Association, vol. 40(3), pages 977-88, July.
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