Borrowing Stigma and Lender of Last Resort Policies

60 Pages Posted: 8 Nov 2018 Last revised: 17 Sep 2023

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: September 15, 2023

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 but actively participated in its special monetary program, the Term Auction Facility, although both programs had the same borrowing requirements. Using an adverse selection model with endogenous borrowing decisions, we explain why the two programs suffer from different stigma costs and how the introduction of TAF incentivized banks' borrowing. We discuss the empirical relevance of the model's 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, Borrowing Stigma and Lender of Last Resort Policies (September 15, 2023). 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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