Discount Window Stigma During the 2007-2008 Financial Crisis

53 Pages Posted: 4 Feb 2011 Last revised: 18 Aug 2015

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 Jr.

Department of Economics, UC San Diego

Date Written: January 22, 2015

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 across funding sources (126 basis points 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 32 basis points of their pre-tax ROA during the crisis. The implications of our results for the provision of liquidity by central banks are discussed.

Keywords: Discount Window, Term Auction Facility, Stigma, Crisis, ABCP, TriParty Repo, monetary policy

JEL Classification: G01, G28, G21, G121

Suggested Citation

Armantier, Olivier and Ghysels, Eric and Sarkar, Asani and Shrader, Jeffrey, Discount Window Stigma During the 2007-2008 Financial Crisis (January 22, 2015). Journal of Financial Economics (JFE), Forthcoming; FRB of New York Staff Report No. 483. Available at SSRN: https://ssrn.com/abstract=1754558 or http://dx.doi.org/10.2139/ssrn.1754558

Olivier Armantier (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Eric Ghysels

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 Jr.

Department of Economics, UC San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

HOME PAGE: http://acsweb.ucsd.edu/~jgshrade/

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