Stigma in Financial Markets: Evidence from Liquidity Auctions and Discount Window Borrowing During the Crisis

Abstract

We provide empirical evidence for the existence, magnitude, and economic impact of stigma associated with discount window liquidity provision by the Federal Reserve. We find that during the height of the financial crisis banks were willing to pay a premium of at least 37 basis points (150 basis points after Lehman’s bankruptcy) on average to borrow from the Term Auction Facility (TAF) rather than from the discount window. The incidence of stigma varied with bank characteristics and market conditions. Finally, we find that discount window stigma is economically relevant since it increased banks’ borrowing costs during the crisis. Our results have important implications for the provision of liquidity by central banks.