Auction-Based Liquidity of Last Resort

Using a regression discontinuity design, I evaluate whether the nature of emergency liquidity provision matters for credit supply in the early stages of a financial crisis. Comparing marginal winners and losers in the Federal Reserve's emergency liquidity auctions, I exploit a unique feature of the Term Auction Facility to isolate the impact of billion dollar, short-term loans during the financial crisis. I show that the Term Auction Facility increased bank loan commitment growth by approximately 10-15 percentage points, an effect that arises despite banks? ability to borrow at the discount window on similar terms should they fail to obtain funding through the Term Auction Facility. I find some support for a stigma-based explanation: this liquidity matters in part because it provides funds that banks would otherwise not have borrowed at the discount window. This result suggests that the non-pecuniary cost of borrowing from the Federal Reserve likely played an important role in exacerbating the lending decline at the onset of the global financial crisis. Consistent with this interpretation, I also show that banks that were highly exposed to real estate provided more credit throughout the crisis when they had the ability to borrow relatively anonymously at the Federal Reserve.