Depositor discipline and LOLR facilities
Abstract
The paper analyses the presence of depositor discipline following the information disclosure of borrowers’ name from the Federal Reserve liquidity facilities. Banks were reluctant to take funds from the Federal Reserve’s Discount Window because in this way they would have been perceived as problematic banks on the market. Term Auction Facility, on the other hand, has been introduced to face this "stigma". Whether the presence of market discipline is well recognised in the literature, scarce is the evidence concerning depositor reactions following the participation in Lender Of Last Resort facilities. Using quarterly US data (FRY-9C) from 2006 to 2016 this work investigates if, following the contraction in the interbank market, these funds have been used as substitutes of wholesale deposits and whether the perception of financial instability has led to depositor discipline. Interestingly, results exhibit the presence of depositor reactions with differences among programs and type of deposits: borrowers from Discount Window exhibit a reduction in non-guaranteed deposits whilst borrowers from Term Auction Facility experienced an increase. Moreover, the analysis on market share excludes the presence of herding effects in states different from states where headquarters are located.
