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Market-Based Solutions to Vital Economic Issues
Research
Nov 1, 2015

Discount Window Stigma During the 2007-2008 Financial Crisis

Abstract

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 2007-2008 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 ROA during the crisis. The implications of our results for the provision of liquidity by central banks are discussed.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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