The Federal Reserve's Discount Window and TAF Programs: 'Pushing on a String?'
Allen N. Berger
University of South Carolina - Moore School of Business; Wharton Financial Institutions Center; European Banking Center
Lamont K Black
DePaul University - Driehaus College of Business
Christa H. S. Bouwman
Texas A&M University; Wharton Financial Institutions Center
Washington University in Saint Louis - John M. Olin Business School
October 13, 2014
The Federal Reserve injected unprecedented liquidity into banks during the recent financial crisis using the discount window and Term Auction Facility. Our examination of these facilities’ use and effectiveness leads to three main findings. First, small bank users were generally weak, whereas large bank users were not, contrary to the Lender of Last Resort theory that weak banks are more likely to use funds. Second, the funds were more of a substitute for than a complement to other funding sources, although the degree of substitution was limited. Third, these facilities increased aggregate lending which would have decreased in their absence. The funds enhanced lending of expanding banks and reduced the decline at contracting banks. Small banks increased small-firm lending, while large banks enhanced large-firm lending. Loan quality only improved at small banks, while both left loan contract terms unchanged.
Number of Pages in PDF File: 69
Keywords: Banks, Discount Window, Term Auction Facility, Central Bank, Lending
JEL Classification: G21, G28, E58working papers series
Date posted: April 28, 2014 ; Last revised: October 15, 2014
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