Featured Research

from universities, journals, and other organizations

U.S. Fed interventions during financial crisis actually worked, study finds

Date:
June 6, 2014
Source:
Washington University in St. Louis
Summary:
Contrary to popular belief, the Federal Reserve’s effort to encourage banks’ lending during the recent financial crisis by providing them short-term loans worked -- and, in fact, worked quite well, a new study finds.

Contrary to popular belief, the Federal Reserve's effort to encourage banks' lending during the recent financial crisis by providing them short-term loans worked -- and, in fact, worked quite well -- a new study finds.

Jennifer Dlugosz, PhD, assistant professor of finance at Washington University in St. Louis' Olin Business School, worked with colleagues Allen Berger, of University of South Carolina; Lamont Black, of DePaul University; and Christina Bouwman, of Case Western Reserve University.

Examining novel data released after the crisis, they found that banks' increased use of the Fed's Discount Window and Term Auction Facility (TAF) was associated with increased lending to firms and households.

They explain their findings in a recent working paper, "The Federal Reserve's Discount Window and TAF Programs: 'Pushing on a String?'" available through the Social Science Research Network.

"There were many news reports during that time that banks were hoarding cash from government interventions and keeping it for themselves," Dlugosz said. "Our results show, at least in the context of these programs, that was not the case. Banks that received funds did increase their lending."

Since its inception, the Federal Reserve has served as a "lender of last resort" to the banking system,via the Discount Window, by providing temporary, short-term funding to solvent banks experiencing liquidity problems.

In 2007-08, as concerns about subprime mortgages grew, banks found their usual market sources of funding more difficult to come by. In response, the Federal Reserve extended Discount Window loans, reduced the cost of credit and established the Term Auction Facility, which aimed to provide funds in an auction format, to stabilize the financial system and increase banks' lending.

Dlugosz and her co-authors set out to see if this effort worked.

Their study answers three questions:

Which banks used funds from the Federal Reserve during the crisis? Did these funds substitute for or complement other funding sources? Did banks use these funds to increase their lending?

Despite the long history of the Fed's role as a lender of last resort, these questions have not been studied previously because the banks receiving funds from the Federal Reserve historically have been kept secret. Information on crisis-time borrowing only became public due to disclosure requirements in the Dodd-Frank Act and Freedom of Information Act requests by Bloomberg News and Fox Business Network.

Dlugosz and her co-authors found that Discount Window and TAF use was widespread. Twenty percent of small banks and more than 60 percent of large banks took advantage of the programs. Some banks relied on the Fed quite heavily, with top borrowers using these programs to fund as much as 5 to 15 percent of assets daily, on average, over the crisis period.

For small and large banks alike, an increase in Discount Window and TAF funding from the Fed was associated with increased lending. Those results held for both short-term and long-term loans, and for virtually all types of lending aside from residential real estate lending.

A common criticism of government support is that it creates "moral hazard." In other words, theere is concern that banks expecting to receive government support will take more risk than they otherwise would.

However, using detailed data on borrower quality and lending terms that's available for a subset of banks in the sample, the study found loan quality stayed the same or improved while contract terms remained unchanged.


Story Source:

The above story is based on materials provided by Washington University in St. Louis. The original article was written by Neil Schoenherr. Note: Materials may be edited for content and length.


Journal Reference:

  1. Allen N. Berger, Lamont K Black, Christa H. S. Bouwman, Jennifer Dlugosz. The Federal Reserve's Discount Window and TAF Programs: 'Pushing on a String?'. SSRN Electronic Journal, 2014; DOI: 10.2139/ssrn.2429710

Cite This Page:

Washington University in St. Louis. "U.S. Fed interventions during financial crisis actually worked, study finds." ScienceDaily. ScienceDaily, 6 June 2014. <www.sciencedaily.com/releases/2014/06/140606120408.htm>.
Washington University in St. Louis. (2014, June 6). U.S. Fed interventions during financial crisis actually worked, study finds. ScienceDaily. Retrieved July 29, 2014 from www.sciencedaily.com/releases/2014/06/140606120408.htm
Washington University in St. Louis. "U.S. Fed interventions during financial crisis actually worked, study finds." ScienceDaily. www.sciencedaily.com/releases/2014/06/140606120408.htm (accessed July 29, 2014).

Share This




More Science & Society News

Tuesday, July 29, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Easier Nuclear Construction Promises Fall Short

Easier Nuclear Construction Promises Fall Short

AP (July 29, 2014) The U.S. nuclear industry started building its first new plants using prefabricated Lego-like blocks meant to save time and prevent the cost overruns that crippled the sector decades ago. So far, it's not working. (July 29) Video provided by AP
Powered by NewsLook.com
$15B Deal on Vets' Health Care Reached

$15B Deal on Vets' Health Care Reached

AP (July 28, 2014) A bipartisan deal to improve veterans health care would authorize at least $15 billion in emergency spending to fix a veterans program scandalized by long patient wait times and falsified records. (July 28) Video provided by AP
Powered by NewsLook.com
The Carbon Trap: US Exports Global Warming

The Carbon Trap: US Exports Global Warming

AP (July 28, 2014) AP Investigation: As the Obama administration weans the country off dirty fuels, energy companies are ramping-up overseas coal exports at a heavy price. (July 28) Video provided by AP
Powered by NewsLook.com
Russia Saves Gecko Sex Satellite, Media Has Some Fun With It

Russia Saves Gecko Sex Satellite, Media Has Some Fun With It

Newsy (July 27, 2014) The satellite is back under ground control after a tense few days, but with a gecko sex experiment on board, the media just couldn't help themselves. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins