The rapidity of deposit outflows throughout the March 2023 banking run highlights the necessary position that the Federal Reserve’s {discount} window ought to play in strengthening monetary stability. A scarcity of borrowing, nonetheless, has plagued the {discount} window for many years, probably as a consequence of banks’ considerations about stigma—that’s, their unwillingness to borrow on the {discount} window as a result of it might be considered as an indication of economic weak point within the eyes of regulators and market individuals. The {discount} window has been reformed a number of instances to alleviate this downside. Though the presence of stigma throughout the nice monetary disaster has been documented empirically, we have no idea whether or not stigma has remained since then. On this publish, based mostly on a current Workers Report, we fill this hole through the use of transaction-level knowledge from the federal funds market to look at whether or not the {discount} window stays stigmatized at present.
Stigma and Realized Stigma
Empirically, stigma could also be recognized by the presence of a unfold over the {discount} window main credit score price {that a} financial institution is prepared to pay to keep away from borrowing on the window. Nevertheless, a financial institution’s willingness to pay just isn’t observable. As a substitute, we observe “realized stigma:” how far more a financial institution truly pays above the first credit score price to borrow. Realized stigma and stigma usually are not equal. Realized stigma gives a decrease certain on the extent of stigma. Particularly, even when a financial institution doesn’t truly pay a premium (as an example, as a result of it borrows on the interbank market under the first credit score price, thus implying no realized stigma), it might have been prepared to take action ex-ante.
Proof of realized stigma, however, is informative: it signifies that stigma is certainly current. In our paper, we comply with the financial literature and measure realized stigma by transactions within the federal funds market, the over-the-counter in a single day U.S. interbank marketplace for funds held by banks on the Fed; we interpret a financial institution buying federal funds above the first credit score price as proof of stigma.
Realized Stigma since 2014
The chart under plots the proportion of federal funds quantity bought above the first credit score price between 2014 and July 2024. We discover little proof of stigma earlier than the COVID-19 pandemic, with lower than 0.1 % of federal funds transactions bought above the first credit score price.
Proof of Low cost Window Stigma
Notes: This chart exhibits the proportion of federal funds quantity bought by home banks above the {discount} window price each day between April 1, 2014 and July 1, 2024. A optimistic worth may be interpreted as proof of {discount} window stigma. The beginning of the final three main monetary disruptions (the September 2019 repo market disruption, the onset of the COVID-19 pandemic, and the March 2023 banking turmoil) are indicated by dashed vertical strains.
The onset of the pandemic noticed a pointy improve in realized stigma. Between March 11 and March 31, 2020, 28 % of federal funds borrowing occurred above the first credit score price, with each kind of financial institution displaying proof of realized stigma.
Proof of stigma light within the months that adopted the pandemic however resurfaced a number of months earlier than the 2023 banking turmoil. Between July 2022 and March 2023, an growing share of federal funds (15 %, on common) was bought by home banks above the first credit score price. Surprisingly, realized stigma didn’t surge after the failure of Silicon Valley Financial institution (SVB) on March 9, 2023. Actually, the post-pandemic peak in realized stigma occurred in December 2022. However, the common dimension of the stigma unfold (the unfold paid over the {discount} window price) greater than doubled, from 10 foundation factors (bps) within the pre-banking turmoil interval to 22 bps within the weeks that adopted the failure of SVB.
Word that realized stigma is frequent in troubled banks. Banks that confirmed indicators of stigma between 2014 and 2024 had been 3 times extra prone to have failed over the identical interval. Furthermore, out of the twenty-two banks that suffered a run throughout the 2023 banking turmoil, 9 had skilled realized stigma within the previous ninety-day interval.
We additionally discover that realized stigma just isn’t as a consequence of an absence of prepositioned collateral on the {discount} window; that’s, it’s not as a consequence of banks’ lack of operational readiness. Particularly, a financial institution that bought federal funds above the {discount} window price throughout the 2023 banking turmoil may have obtained virtually 80 % of these funds (on common) from the {discount} window, based mostly on the quantity of collateral it had prepositioned on the {discount} window.
The Determinants of Realized Stigma
To higher perceive the determinants of realized stigma, we conduct a statistical evaluation. The outcomes reveal a extremely statistically and economically important persistence in realized stigma: banks that borrow federal funds above the {discount} window price are about 40 % extra probably to take action once more the next month. Per stigma, banks that don’t go to the {discount} window are considerably extra prone to present subsequent realized stigma.
Furthermore, a financial institution is considerably extra prone to show realized stigma after growing in dimension, turning into financially weaker (that’s, having a decrease ratio of U.S. Treasury securities or a better ratio of held-to-maturity losses), or when its share of other funding sources declines (decrease Federal House Mortgage Financial institution borrowing). Wanting on the post-June 2022 interval, when stigma turned prevalent, a few of these determinants modified; particularly, banks with decrease money holdings and better uninsured deposit liabilities turned extra prone to exhibit realized stigma.
Concluding Remarks
On this publish, we current proof of {discount} window stigma within the years because the international monetary disaster utilizing transaction-level knowledge from the federal funds market. Proof of realized stigma is especially sturdy round durations of economic market turmoil, corresponding to throughout the COVID-19 pandemic and the March 2023 banking turmoil. Our outcomes counsel that {discount} window stigma remains to be a difficulty, probably limiting the {discount} window’s means to ameliorate monetary stability in instances of turmoil.
Olivier Armantier is a professor on the Financial Science Institute, Chapman College.
Marco Cipriani is the pinnacle of Cash and Funds Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.
Asani Sarkar is a monetary analysis advisor in Non-Financial institution Monetary Establishment Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.
The best way to cite this publish:
Olivier Armantier, Marco Cipriani, and Asani Sarkar, “Low cost Window Stigma After the World Monetary Disaster,” Federal Reserve Financial institution of New York Liberty Road Economics, January 17, 2025, https://libertystreeteconomics.newyorkfed.org/2025/01/discount-window-stigma-after-the-global-financial-crisis/.
Disclaimer
The views expressed on this publish are these of the creator(s) and don’t essentially mirror the place of the Federal Reserve Financial institution of New York or the Federal Reserve System. Any errors or omissions are the accountability of the creator(s).
