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

Armantier, Olivier; Ghysels, Éric; Sarkar, Asani; Shrader, Jeffrey

doi:10.2139/ssrn.1572066

Cited by 43 publications

(34 citation statements)

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“…The latter refers to the reluctance of banks to borrow from the discount window because of fear that the bad news will become publicly known. Armantier et al (2010) find that during the crisis banks borrowed from the Term Auction Facility, in which the borrowing bank is one of many, at higher rates than those available at the discount window, and that this spread was increasing with more stressed conditions in the interbank market. The spread indicates how much a bank is willing to pay to avoid the release of a public bad signal.…”

Section: Empirical Evidencementioning

confidence: 95%

“…There is also evidence of the multiplier effect of public information (Proposition 2 (iii)) in the credit registry expansion in Argentina (Hertzberg et al (2011)) and with discount window stigma (Armantier et al (2010)). The latter refers to the reluctance of banks to borrow from the discount window because of fear that the bad news will become publicly known.…”

Section: Empirical Evidencementioning

confidence: 97%

“…3 Such as the case of the run on IndyMac Bancorp in June 2008 which followed shortly after the public release of letters by Senator Schumer of the Banking Committee. 4 See Armantier et al (2010). 5 See, for example, FSA (2009) andBIS (2009).…”

Section: Introductionmentioning

confidence: 99%

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Strategic Complementarity, Fragility, and Regulation

Vives

2014

Rev. Financ. Stud.

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Strategic Complementarity, Fragility, and Regulation Terms of use: Documents in AbstractThe paper analyzes a very stylized model of crises and demonstrates how the degree of strategic complementarity in the actions of investors is a critical determinant of fragility. It is shown how the balance sheet composition of a financial intermediary, parameters of the information structure (precisions of public and private information), and the level of stress indicators in the market impinge on the degree of strategic complementarity. The model distinguishes between solvency and liquidity risk and characterizes them. Both a solvency (leverage) and a liquidity ratio are required to control the probabilities of insolvency and illiquidity. It is found that in a more competitive environment (with higher return on shortterm debt) the solvency requirement has to be strengthened, and in an environment where the fire sales penalty is higher and fund managers are more conservative the liquidity requirement has to be strengthened while the solvency one relaxed. Higher disclosure or introducing a derivatives market may backfire, aggravating fragility (in particular when the asset side of a financial intermediary is opaque) and, correspondingly, liquidity requirements should be tightened. The model is applied to interpret the 2007 run on SIV and ABCP conduits.JEL-Code: G210, G280.

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Section: Empirical Evidencementioning

confidence: 95%

Section: Empirical Evidencementioning

confidence: 97%

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Strategic Complementarity, Fragility, and Regulation

Vives

2014

Rev. Financ. Stud.

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“…Policy makers seem to worry that participation in lender‐of‐last‐resort borrowing from the central bank might convey an unfavorable signal to market participants and depositors (Peristiani ; Furfine ; Darrat et al ; Armantier et al ). Indeed, evidence exists supporting the notion of a stigma associated with borrowing from the Fed.…”

Section: Related Literaturementioning

confidence: 99%

“…Knowledge of a bank's participation in either of the Fed's lender‐of‐last‐resort facilities could have provided an unfavorable signal to both financial markets and depositors, which could have reduced public confidence in the stability of the participating bank . Empirical research tends to support this contention of a stigma associated with borrowing from the Fed (Peristiani ; Furfine ; Darrat et al ; Armantier et al ).…”

Section: Introductionmentioning

confidence: 99%

The Financial Impact of Lender‐of‐last‐resort Borrowing From the Federal Reserve During the Financial Crisis

Blau

Hein²,

Whitby

2016

J of Financial Research

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The U.S. Federal Reserve (Fed) was reluctant to release the names of firms that borrowed, and the amounts borrowed, from the emergency loan facilities during the financial crisis. We show that when the details of this information were finally made public by the Fed, there was no stock market reaction, contrary to the thought that this was valuable information. However, further investigation shows that stock returns for publicly traded borrowing institutions declined significantly and almost immediately after the Fed borrowing was initiated, although the information had not been made public by the Fed at the time. The underperformance of borrowing institutions was greatest for those that received the largest loans or had the largest amount of loans outstanding. This evidence is consistent with the idea that investors were able to trade on the information about the Fed's emergency loan program, although the Fed purposely tried to keep the information private.

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Innovations in Lender of Last Resort Policy in Europe

González-Páramo

2013

Handbook of Safeguarding Global Financial Stability

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

Cited by 43 publications

References 14 publications

Strategic Complementarity, Fragility, and Regulation

Strategic Complementarity, Fragility, and Regulation

The Financial Impact of Lender‐of‐last‐resort Borrowing From the Federal Reserve During the Financial Crisis

Innovations in Lender of Last Resort Policy in Europe

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