The central bank funding stigma
Yesterday the Federal Reserve Bank of New York published a brand new study about the stigma associated with banks borrowing from the central bank’s discount window. That was a nice coincidence following my response to Scott Fullwiler on the MMT and endogenous money theory, which seems to ignore this stigma (or at least to downplay its impact) and to consider that banks freely borrow from the central bank, providing a perfectly elastic high-powered money (reserves) supply. On the contrary, in my view, the stigma is one of the fundamental reasons that undermine the endogenous money theory.
Essentially, the NY Fed does not see much reason for this stigma to exist, but acknowledges that it does exist… I think they entirely forgot the possible impacts on a bank and its stakeholders of being considered illiquid, which I described in my previous post. Nonetheless, they made some good points (see below). A key point in my opinion is that banks are willing to pay more for other sources of funding than use the cheaper discount window.
The four main hypotheses they tested were very US-centric but interesting nonetheless. They found that:
- Banks inside the New York District were 14% less likely to experience the stigma than banks outside of the district (admittedly not that much difference)
- Foreign banks were 28% more likely to experience the stigma than similar US peers
- The largest the financial markets disruption, the higher the stigma
- The stigma does not decline when more banks utilise the discount window