Stigma in Financial Markets: Evidence from Liquidity Auctions and Discount Window Borrowing During the Crisis

39 Pages Posted: 16 Mar 2010 Last revised: 18 Mar 2010

See all articles by Olivier Armantier

Olivier Armantier

Federal Reserve Bank of New York

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Asani Sarkar

Federal Reserve Bank of New York

Jeffrey Shrader

Columbia University - School of International & Public Affairs (SIPA)

Date Written: March 15, 2010

Abstract

While the perception of stigma attached to borrowing from the discount window complicates the Fed's efforts to help banks in urgent need for funds during times of crisis, there exists little evidence supporting the presence of stigma in financial markets. In this paper, we provide rigorous evidence of the existence and incidence of discount window stigma during the financial crisis of 2007. For example, during the summer of 2008, banks preferred to pay on average at least 34 basis points more to borrow from the Fed's Term Auction Facility than from the discount window. The probability of paying a borrowing premium is higher for banks in greater need of liquidity, and in periods when market funding conditions worsen. Finally, we find that the perception of stigma is associated with real effects in asset markets. In particular, banks' interbank borrowing rate is higher the day after a discount window visit and its stock return is lower. Our results have implications for the best way for central banks to supply liquidity during crisis periods.

Keywords: Treasury Auction Facility, Discount Window Borrowing

JEL Classification: E44, E58

Suggested Citation

Armantier, Olivier and Ghysels, Eric and Sarkar, Asani and Shrader, Jeffrey, Stigma in Financial Markets: Evidence from Liquidity Auctions and Discount Window Borrowing During the Crisis (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1572066 or http://dx.doi.org/10.2139/ssrn.1572066

Olivier Armantier

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Eric Ghysels (Contact Author)

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

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://www.unc.edu/~eghysels/

Asani Sarkar

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

Jeffrey Shrader

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://jeffreyshrader.com

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