Standing facilities and interbank borrowing: Evidence from the federal reserve's new discount window

Research output: Contribution to journalArticle

  • 22 Citations

Abstract

Standing facilities are designed to place an upper bound on the rates at which financial institutions lend to one another overnight, reducing the volatility of the overnight interest rate, typically the rate targeted by central banks. However, improper design of the facility might decrease a bank's incentive to participate actively in the interbank market. Thus, the mere availability of central-bank-provided credit may lead to its use being greater than what would be expected based on the characteristics of the interbank market. By contrast, however, banks may perceive a stigma from using such facilities, and thus borrow less than what one might expect, thereby reducing the facilities' effectiveness at reducing interest rate volatility. We develop a model demonstrating these two alternative implications of a standing facility. Empirical predictions of the model are then tested using data from the Federal Reserve's new primary credit facility and the US federal funds market. A comparison of data from before and after recent changes to the discount window suggests continued reluctance to borrow from the Federal Reserve.

LanguageEnglish (US)
Pages329-347
Number of pages19
JournalInternational Finance
Volume6
Issue number3
StatePublished - Dec 1 2003

Fingerprint

central bank
interest rate
market
evidence
incentive
credit
bank
prediction
Federal Reserve
Borrowing
Discount window
rate
volatility
comparison
Interbank market
Credit
Central bank

ASJC Scopus subject areas

  • Development
  • Geography, Planning and Development

Cite this

@article{a6958da515734bf08da3675a4571f6b1,
title = "Standing facilities and interbank borrowing: Evidence from the federal reserve's new discount window",
abstract = "Standing facilities are designed to place an upper bound on the rates at which financial institutions lend to one another overnight, reducing the volatility of the overnight interest rate, typically the rate targeted by central banks. However, improper design of the facility might decrease a bank's incentive to participate actively in the interbank market. Thus, the mere availability of central-bank-provided credit may lead to its use being greater than what would be expected based on the characteristics of the interbank market. By contrast, however, banks may perceive a stigma from using such facilities, and thus borrow less than what one might expect, thereby reducing the facilities' effectiveness at reducing interest rate volatility. We develop a model demonstrating these two alternative implications of a standing facility. Empirical predictions of the model are then tested using data from the Federal Reserve's new primary credit facility and the US federal funds market. A comparison of data from before and after recent changes to the discount window suggests continued reluctance to borrow from the Federal Reserve.",
author = "Craig Furfine",
year = "2003",
month = "12",
day = "1",
language = "English (US)",
volume = "6",
pages = "329--347",
journal = "International Finance",
issn = "1367-0271",
publisher = "Wiley-Blackwell",
number = "3",

}

Standing facilities and interbank borrowing : Evidence from the federal reserve's new discount window. / Furfine, Craig.

In: International Finance, Vol. 6, No. 3, 01.12.2003, p. 329-347.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Standing facilities and interbank borrowing

T2 - International Finance

AU - Furfine,Craig

PY - 2003/12/1

Y1 - 2003/12/1

N2 - Standing facilities are designed to place an upper bound on the rates at which financial institutions lend to one another overnight, reducing the volatility of the overnight interest rate, typically the rate targeted by central banks. However, improper design of the facility might decrease a bank's incentive to participate actively in the interbank market. Thus, the mere availability of central-bank-provided credit may lead to its use being greater than what would be expected based on the characteristics of the interbank market. By contrast, however, banks may perceive a stigma from using such facilities, and thus borrow less than what one might expect, thereby reducing the facilities' effectiveness at reducing interest rate volatility. We develop a model demonstrating these two alternative implications of a standing facility. Empirical predictions of the model are then tested using data from the Federal Reserve's new primary credit facility and the US federal funds market. A comparison of data from before and after recent changes to the discount window suggests continued reluctance to borrow from the Federal Reserve.

AB - Standing facilities are designed to place an upper bound on the rates at which financial institutions lend to one another overnight, reducing the volatility of the overnight interest rate, typically the rate targeted by central banks. However, improper design of the facility might decrease a bank's incentive to participate actively in the interbank market. Thus, the mere availability of central-bank-provided credit may lead to its use being greater than what would be expected based on the characteristics of the interbank market. By contrast, however, banks may perceive a stigma from using such facilities, and thus borrow less than what one might expect, thereby reducing the facilities' effectiveness at reducing interest rate volatility. We develop a model demonstrating these two alternative implications of a standing facility. Empirical predictions of the model are then tested using data from the Federal Reserve's new primary credit facility and the US federal funds market. A comparison of data from before and after recent changes to the discount window suggests continued reluctance to borrow from the Federal Reserve.

UR - http://www.scopus.com/inward/record.url?scp=0348167852&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0348167852&partnerID=8YFLogxK

M3 - Article

VL - 6

SP - 329

EP - 347

JO - International Finance

JF - International Finance

SN - 1367-0271

IS - 3

ER -