Liquidity from Two Lending Facilities

32 Pages Posted: 21 Aug 2017

See all articles by Sriya Anbil

Sriya Anbil

Board of Governors of the Federal Reserve System

Angela Vossmeyer

Claremont McKenna College - Robert Day School of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 11, 2017

Abstract

During financial crises, the Lender of Last Resort (LOLR) uses lending facilities to inject critical funding into the banking sector. An important obstacle for policymakers is designing the facility so that banks are not reluctant to approach due to stigma, and attracting banks with liquidity concerns rather than those prone to risk-taking and moral hazard incentives. We use an unexpected disclosure that introduced stigma at one of two similar LOLRs during the Great Depression to evaluate whether or not banks used LOLR assistance to improve their liquidity needs using a novel trivariate model with recursive endogeneity. We find evidence that banks that approached the facility with stigma were less liquid and reduced their position of safe assets in comparison with banks that approached the facility with no stigma. Thus, stigma forced the pool of LOLR borrowers to separate into different groups of banks that ex-post revealed their liquidity preferences to policymakers. This finding informs policymakers' ex-ante decision of designing a facility that only attracts banks with liquidity concerns.

Keywords: lender of last resort, risk-taking, Great Depression, liquidity, stigma

JEL Classification: G21,G28,N12

Suggested Citation

Anbil, Sriya and Vossmeyer, Angela, Liquidity from Two Lending Facilities (August 11, 2017). Available at SSRN: https://ssrn.com/abstract=3021272 or http://dx.doi.org/10.2139/ssrn.3021272

Sriya Anbil (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Angela Vossmeyer

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

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