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Why Emergency Lending Facilities Go Unused

  • Leonardo Bartolini
  • Allan Drazen

In recent years, many emergency lending mechanisms have failed dramatically in their goal of providing financing of last resort to borrowers in need for liquidity: potential borrowers have been reluctant to seek financing, fearing that a request for funds could be seen as a sign of financial weakness, carrying a costly stigma with investors and regulators. This was the experience in the United States with the discount window since the mid 1980s, the Y2K Special Lending Facility, and the Primary Lending program that supplanted the discount window in 2003. Internationally, this was also the experience with the IMF's Contingent Credit Line and a number of voluntary bank rescue packages in Mexico, Japan, and elsewhere. We present an asymmetric information model of voluntary emergency borrowing that explains why lender of last resort facilities may go unused in equilibrium and why such equilibria may persist for a long ti

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 746.

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Date of creation: 2004
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Handle: RePEc:red:sed004:746
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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