Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies

56 Pages Posted: 8 Nov 2018 Last revised: 13 Oct 2021

See all articles by Yunzhi Hu

Yunzhi Hu

University of North Carolina (UNC) at Chapel Hill - Finance Area

Hanzhe Zhang

Department of Economics, Michigan State University

Date Written: October 13, 2021

Abstract

How should the lender of last resort provide liquidity to banks during periods of financial distress? During the 2008-2010 crisis, banks avoided borrowing from the Fed's long-standing discount window (DW), but actively participated in its special monetary program, the Term Auction Facility (TAF), although both programs had the \emph{same} borrowing requirements. Using an adverse selection model with endogenous borrowing decisions, we explain why two programs suffer from different stigma and how the introduction of TAF incentivized banks' borrowing. We synthesize several data sources to confirm our main theoretical predictions.

Keywords: lending of last resort, discount window stigma, Term Auction Facility, adverse selection

JEL Classification: G01, E52, D44, E58

Suggested Citation

Hu, Yunzhi and Zhang, Hanzhe, Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies (October 13, 2021). Available at SSRN: https://ssrn.com/abstract=3281140 or http://dx.doi.org/10.2139/ssrn.3281140

Yunzhi Hu (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Hanzhe Zhang

Department of Economics, Michigan State University ( email )

486 West Circle Drive
East Lansing, MI 48824
United States

HOME PAGE: http://hanzhezhang.github.io/

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