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Which Dealers Borrowed from the Fed’s Lender-of-Last-Resort Facilities?

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Abstract

During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions—the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more. Our findings reinforce the importance of Bagehot’s principle that the lender-of-last resort should lend only against high-quality collateral and at a penalty rate so as to discourage unneeded or opportunistic borrowing.

Suggested Citation

  • Viral V. Acharya & Michael J. Fleming & Warren B. Hrung & Asani Sarkar, 2017. "Which Dealers Borrowed from the Fed’s Lender-of-Last-Resort Facilities?," Liberty Street Economics 20170510, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87193
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    Keywords

    stigma; insolvency; central banking; illiquidity; Lender of last resort; crises;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • H1 - Public Economics - - Structure and Scope of Government

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