Auction-Based Liquidity of Last Resort

Abstract

I use a fuzzy regression discontinuity design to study the impact of auction-based emergency liquidity at the onset of the 2007-09 crisis. My empirical design uses the presence of binding capacity constraints in the Federal Reserve's Term Auction Facility to isolate variation in short-term borrowing through this program. I find that the growth in marginal winners' outstanding loan commitments is about 15% higher than marginal losers. This effect stems through more lending: marginal winners' loan growth was about 8% higher than that of marginal losers. These effects arise despite the ability to replicate this auction-based liquidity's funding structure through the discount window. They highlight that banks would have relied considerably less on the Federal Reserve had only the discount window been in place during the crisis. I discuss the role of discount window stigma in partly explaining these results.

Keywords: Emergency Liquidity Provision, Financial Crisis, Discount Window, Term Auction Facility, Monetary Policy, Stigma