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

37 Pages Posted: 8 Nov 2018 Last revised: 17 Apr 2019

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: April 15, 2019

Abstract

How should the government effectively provide liquidity to banks during periods of financial distress? During the most recent financial crisis, banks avoided borrowing from the Fed's Discount Window (DW) but bid more in its Term Auction Facility (TAF), although both programs share similar requirements on participation. Moreover, some banks paid higher interest rates in the auction than the concurrent discount rate. Using a model with endogenous borrowing stigma, we explain how the combination of the DW and the TAF increased banks' borrowings and willingnesses to pay for loans from the Fed. Using micro-level data on DW borrowing and TAF bidding from 2007 to 2010, we confirm our theoretical predictions about the pre-borrowing and post-borrowing conditions of banks in different facilities. Finally, we discuss the design of lending-of-last-resort policies.

Keywords: discount window stigma, auction, adverse selection, lending of last resort

JEL Classification: G01, D44, E58

Suggested Citation

Hu, Yunzhi and Zhang, Hanzhe, Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies (April 15, 2019). 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://www.msu.edu/~hanzhe/

Register to save articles to
your library

Register

Paper statistics

Downloads
56
Abstract Views
356
rank
371,990
PlumX Metrics