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Report
Financial amplification mechanisms and the Federal Reserve's supply of liquidity during the crisis
The small decline in the value of mortgage-related assets relative to the large total losses associated with the financial crisis suggests the presence of financial amplification mechanisms, which allow relatively small shocks to propagate through the financial system. We review the literature on financial amplification mechanisms and discuss the Federal Reserve's interventions during different stages of the crisis in light of this literature. We interpret the Fed's early-stage liquidity programs as working to dampen balance sheet amplifications arising from the positive feedback between ...
Discussion Paper
Is There Stigma to Discount Window Borrowing?
The Federal Reserve employs the discount window (DW) to provide funding to fundamentally solvent but illiquid banks (see the March 30 post “Why Do Central Banks Have Discount Windows?”). Historically, however, there has been a low level of DW use by banks, even when they are faced with severe liquidity shortages, raising the possibility of a stigma attached to DW borrowing. If DW stigma exists, it is likely to inhibit the Fed’s ability to act as lender of last resort and prod banks to turn to more expensive sources of financing when they can least afford it. In this post, we provide ...
Report
Discount window stigma during the 2007-2008 financial crisis
We provide empirical evidence for the existence, magnitude, and economic cost of stigma associated with banks borrowing from the Federal Reserve?s Discount Window (DW) during the 2007-08 financial crisis. We find that banks were willing to pay a premium of around 44 basis points across funding sources (126 basis points after the bankruptcy of Lehman Brothers) to avoid borrowing from the DW. DW stigma is economically relevant as it increased some banks? borrowing cost by 32 basis points of their pre-tax return on assets (ROA) during the crisis. The implications of our results for the provision ...
Journal Article
Financial amplification mechanisms and the Federal Reserve’s supply of liquidity during the crisis
New York Fed economists Asani Sarkar and Jeffrey Shrader examine the Federal Reserve?s recent liquidity actions in the context of studies on financial amplification mechanisms, whereby an initial financial sector shock triggers substantially larger shocks elsewhere in the sector and in the broader economy. Presented at "Central Bank Liquidity Tools and Perspectives on Regulatory Reform" a conference sponsored by the Federal Reserve Bank of New York, February 19-20, 2009.