Dealer Financial Conditions and Lender-of-Last-Resort Facilities

51 Pages Posted: 17 Mar 2012

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Michael J. Fleming

Federal Reserve Bank of New York

Warren B. Hrung

Federal Reserve Bank of New York

Asani Sarkar

Federal Reserve Bank of New York

Date Written: March 15, 2012

Abstract

Do central bank lender-of-last-resort (LOLR) facilities elicit greater and more aggressive participation from less capitalized financial firms? We answer this question by examining financial conditions of dealers that participated in the Federal Reserve’s Term Securities Lending Facility (TSLF), a LOLR facility that provided liquidity against a range of assets during 2008-09. We find that, in the cross-section, dealers with more leverage and lower equity returns prior to a TSLF auction were more likely to participate in the auction and bid more aggressively (i.e., bid more and at higher bidding rates). These effects were stronger for auctions that allowed tendering of more illiquid collateral. We find some support for reluctance of firms to participate given a lack of participation in earlier auctions, but such “stigma“ does not fully explain the effect of leverage in inducing greater participation. Our results suggest the importance of considering solvency concerns of banks when designing LOLR facilities during times of aggregate liquidity shortages.

Keywords: lender of last resort, central banking, crises, illiquidity, insolvency, stigma

JEL Classification: G01, G28, E58, D44

Suggested Citation

Acharya, Viral V. and Fleming, Michael J. and Hrung, Warren B. and Sarkar, Asani, Dealer Financial Conditions and Lender-of-Last-Resort Facilities (March 15, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023808 or http://dx.doi.org/10.2139/ssrn.2023808

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Michael J. Fleming (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6372 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/fleming/

Warren B. Hrung

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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

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