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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 ...
Discussion Paper
Did the Fed’s Term Auction Facility Work?
The Federal Reserve introduced the Term Auction Facility (TAF) in December 2007 to provide term loans to banks during the recent financial crisis. In this post, we report on the effectiveness of the TAF during the early stages of the crisis. We find that the TAF was associated with a decrease in the “liquidity premium,” one component of a bank’s borrowing cost. In other words, the TAF worked as intended.
Report
The effect of the Term Auction Facility on the London inter-bank offered rate
The Term Auction Facility (TAF), the first auction-based liquidity initiative by the Federal Reserve during the global financial crisis, was aimed at improving conditions in the dollar money market and bringing down the significantly elevated London interbank offered rate (Libor). The effectiveness of this innovative policy tool is crucial for understanding the role of the central bank in financial stability, but academic studies disagree on the empirical evidence of the TAF effect on Libor. We show that the disagreement arises from misspecifications of econometric models. Regressions using ...