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The Fed’s Bank Bailout

Thursday, March 16, 2017 13:10
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New research on the Fed’s bank bailout during the financial crisis:

The fed’s bank bailout, EurekAlert!:…While many Americans know the Fed for its role in making monetary policy, it serves another lesser-known but hugely important purpose: providing temporary, short-term funds to banks as a “lender of last resort.”

During the financial crisis from 2007-09, the Fed took drastic steps to ensure that banks had access to liquidity so they could continue lending. …

For the first time, new research from Washington University in St. Louis examines data from the crisis to show how the Fed can effectively assist banks in times of financial uncertainty. No matter the program or the bank size, this infusion of liquidity spurred lending that ultimately reached homes and businesses, thereby benefiting the economy, the researchers found in their analysis.

“Perhaps contrary to popular beliefs, our research shows that the Fed’s actions were effective in encouraging banks to lend. This suggests that the credit crunch we witnessed could have been a lot worse in the absence of these facilities,” said Jennifer Dlugosz, assistant professor of finance at Olin Business School, and a former economist at the Board of Governors of the Federal Reserve System. …

During the course of their research, Dlugosz and her co-authors [Allen Berger, professor of banking and finance at the University of South Carolina, Lamont Black, assistant professor of finance at DePaul University, and Christa Bouwman, associate professor of finance at Texas A&M University] found a total of 20 percent of small U.S. banks and 62 percent of bigger U.S. banks — more than 2,000 in all — used the Discount Window or the Term Auction Facility at some point during the crisis. The access to liquidity increased bank lending of almost all types. Meanwhile, they found no evidence that banks were making riskier loans.

“We examined whether or not the Discount Window and the Term Auction Facility helped encourage banks to lend during the crisis,” Dlugosz said. “We find that it did. It looks like one extra dollar in liquidity support from the Fed to a bank results in somewhere between 30 to 60 cents in additional lending by the bank, depending on its size.

“It wasn’t obvious at the time whether this was going to work. …”



Source: http://economistsview.typepad.com/economistsview/2017/03/the-feds-bank-bailout.html

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