Liquidity from Two Lending Facilities

33 Pages Posted: 8 Dec 2017 Last revised: 12 Dec 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: December, 2017

Abstract

During financial crises, the lender of last resort (LOLR) uses lending facilities to inject critical funding into the banking sector. The facilities need to be designed in such a way that banks are not reluctant to seek assistance due to stigma and that banks with liquidity concerns are attracted 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 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. This finding sheds light on why and when banks approach their LOLR.

Keywords: Banks, credit unions, other financial institutions, Great Depression, Lender of last resort, Liquidity, Stigma

JEL Classification: G01, G18, G21, N22

Suggested Citation

Anbil, Sriya and Vossmeyer, Angela, Liquidity from Two Lending Facilities (December, 2017). FEDS Working Paper No. 2017-117, Available at SSRN: https://ssrn.com/abstract=3083402 or http://dx.doi.org/10.17016/FEDS.2017.117

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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