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April 2020, EB20-04

Economic Brief

Understanding Discount Window Stigma
By Huberto M. Ennis and David A. Price

The discount window is a tool that the Federal Reserve has long used to
increase the stability of the financial system, but some believe its effectiveness is diminished by stigma: institutions may avoid borrowing from it
out of concern that they may be perceived as being in weakened financial condition. Recent Richmond Fed research has shed new light on the
functioning of the discount window and the role that stigma may play in
achieving desirable outcomes.
One of the Federal Reserve System’s important
and longstanding institutions is the discount
window — or to be more precise, the discount
windows, plural, of the regional Reserve Banks.
Through their discount windows, the Reserve
Banks make short-term loans to depository institutions, generally at a rate modestly higher than
the market rate. This policy is widely viewed as
contributing to the stability of the financial system by making liquidity available to institutions
that cannot, for temporary reasons associated
with various market frictions, satisfy their liquidity needs by borrowing on the private market.
This is, for example, how the Fed used the discount window (and other Fed lending facilities)
during the 2007–08 global financial crisis (GFC)
and how it is using it today in the context of
the coronavirus crisis. (Historically, the discount
window was also a tool of monetary policy; more
recently, open market operations have largely
supplanted the discount window in that role.)1

Fed more than a century ago, some aspects of
its operation are still poorly understood — most
notably, the extent to which borrowing from it
carries a stigma in the eyes of potential counterparties. Currently, discount window borrowing
remains undisclosed for two years, but there
are reasons to believe that use of the discount
window can sometimes be inferred circumstantially by other financial market participants.2 To
the extent that an institution’s discount window
borrowing becomes known to other parties, it is
possible in principle that those other parties will
draw negative conclusions about the institution’s health; if the institution were in good financial condition, the argument goes, it would have
borrowed privately at the market rate rather than
paying the discount window’s higher penalty
rate. The fear of such a stigma would make institutions that need liquidity more reluctant to borrow from the discount window — a reluctance
that could work against the program’s purposes.

Although the discount window has existed in
various forms almost since the creation of the

Stigma is important to understand because
the discount window and other similar lending

EB20-04 – Federal Reserve Bank of Richmond

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facilities are tools on which policymakers rely during
financial crises. Even in response to recent temporary spikes in repo market interest rates, including a
significant one last September, there were extensive
discussions of the possibility of establishing a Fedsponsored repo facility to provide liquidity in times
of stress in that important market. The issue of stigma
was an important consideration for those thinking
about the appropriate design of such a facility.3
Besides addressing events of strain in funding markets, a well-functioning discount window can be
useful for other purposes, as well; for example, Fed
Vice Chair Randal Quarles argued in a February 2020
speech that the discount window should play a more
active role in making reserves and Treasury securities
substitutable from the perspective of banks, thereby
curbing undue holdings of reserves.4 In short, there
is a variety of situations in which policymakers may
like to rely on programs such as the discount window,
and stigma could interfere with their objectives.
Recent research at the Richmond Fed by one of
the coauthors of this Economic Brief (Ennis) offers a
new perspective to deepen understanding of the
mechanisms driving discount window stigma.5 This
research, published in the Journal of Money, Credit
and Banking, investigates the implications for stigma
of a workhorse model in financial economics in which
the discount window can enhance the efficient operation of lending markets.
Stigma and Fed Lending Programs
From the late 1920s until the early 2000s, the Fed
discouraged discount window borrowing through
various restrictions on access to the window. In lieu
of charging a penalty rate, the Fed issued regulations
during this period delineating “appropriate” and
“inappropriate” purposes for borrowing from the
window and added a requirement in 1973 that banks
must first exhaust alternative sources of credit.6 The
Fed reversed this approach in 2003, creating the
Primary Credit program in which financially healthy
and well-capitalized banks could borrow from the
discount window with no questions asked but at a
higher interest rate. (The Secondary Credit program

makes loans on a case-by-case basis to banks that do
not qualify for Primary Credit.) In theory, the restrictions on eligibility for Primary Credit should guarantee
financial strength on the part of participants and thus
should reduce, if not eliminate, the possibility of stigma associated with borrowing through that program.
Nonetheless, stigma remained a significant concern
of policymakers after 2003, most importantly as they
considered responses to the GFC. Then-Fed Chair
Ben Bernanke, then-New York Fed President Timothy
Geithner, and then-Treasury Secretary Henry Paulson have noted that the design of the Fed’s novel
Term Auction Facility (TAF), with its use of an auction
process and other technical features, was meant to
avoid concerns about stigma.7 These concerns also
extended to programs created by fiscal authorities
during this period: the same policymakers have
recounted that the heads of nine of the largest U.S.
financial firms were asked to take capital under the
Troubled Assets Relief Program (TARP) to make the
program appear less stigmatizing from the perspective of smaller institutions.8
There is some evidence that discount window stigma
did influence outcomes during the financial crisis.
Olivier Armantier and Asani Sarkar of the New York
Fed, Eric Ghysels of the University of North Carolina,
Chapel Hill, and Jeffrey Shrader of Columbia University analyzed TAF borrowing from December 2007 to
September 2008 and found that banks were willing to pay a premium to avoid borrowing from the
discount window. In other words, some banks were
willing to pay higher interest rates in the market or at
the TAF than the ones they could have obtained at
the discount window. One candidate explanation
for such an anomaly is the presence of extra stigmabased cost from discount window borrowing.9
Concerns about stigma have persisted. Anecdotal
reports have indicated that stigma, and the resulting
desire to avoid discount window borrowing, is one
motivation of large banks to hold large amounts of
cash (reserves).10 And most recently, the Fed announced on March 15, 2020, that it was lowering the
Primary Credit interest rate by 1.5 percentage points

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to 0.25 percent, effectively reducing or eliminating
the penalty component of the rate;11 this move has
been generally interpreted as reflecting policymakers’ desire to reduce stigma.12
Modeling Discount Window Stigma
To assess the effects of stigma, Ennis employed a
workhorse model in financial economics. That model
was originally developed to analyze situations in
which a firm’s managers have more information
about the value of the firm than its potential outside
investors — a situation analogous to lending markets for banks, in which the bank has more information about its ability to repay than its creditors.13 In
both cases, there is potential for adverse selection
given the coexistence of good and bad risks in the
market and the limited ability of investors or lenders to tell them apart. Such a situation tends to lead
to asset prices that are too low (or interest rates that
are too high), from the perspective of firms that are
good (that is, low) risks, driving good risks out of
the market.
Ennis built on work by Thomas Philippon of New
York University and Vasiliki Skreta of the University
of Texas, who used this model to analyze the optimal
design of government programs to intervene in financial markets suffering from adverse selection but
did not investigate stigma explicitly.14 Ennis’s objective is to uncover the main implications for stigma of
this widely used framework, extending the model in
relevant ways that allow him to address explicitly the
role of stigma in the context of the discount window. Ennis’s model assumes both that banks have
information about their ability to repay their debts,
unknown to other market participants, and that
discount window borrowing is observable. The assumption of complete observability is used only for
simplicity; a lower probability of observation would
have delivered comparable results.
Findings on the Discount Window
and Adverse Selection
Ennis found that in the equilibrium of the model, the
average riskiness of borrowers at the discount window
can indeed be higher than that of banks in general. In

that way, borrowing from the discount window can
function as a signal of possible financial weakness.
Furthermore, under some conditions, the model generates the pattern of interest rates often associated
with the presence of stigma. Indeed, in the model,
some discount window borrowers pay higher rates
in the market than those paid by banks that do not
borrow from the discount window; moreover, some
banks are willing to pay higher interest rates in the
market than the ones they would be able to obtain
at the discount window, thus avoiding the discount
window altogether. These patterns originate from the
fact that discount window borrowers in the model
are correctly perceived by the market as less healthy,
a feature that has been shown to be essential for a
rational explanation of discount window stigma.15
Ennis shows that in the context of the model, the
configurations that give rise to stigma also enhance
the efficacy of the discount window in promoting
market efficiency. Because the discount window
attracts inferior risks (which is the source of stigma),
it helps to mitigate the adverse selection problem in
the market for private credit. As a result, interest rates
can decrease and more of the low-risk firms are able
(and willing) to receive external funding and invest.
Given that adverse selection in the absence of
intervention produces inefficiently low investment,
a discount window that attracts relatively risky banks
can produce desirable economic outcomes.
Ennis’s model also highlights a delicate interaction
between borrowing at the discount window and
borrowing in the market, when banks can do both,
as is normally the case. In a form of preemptive
borrowing, some banks in the model borrow from
the discount window to reduce the amount that
they may need to borrow from the market later.
Given that market interest rates are relatively more
sensitive to repayment risks, some banks are able
to reduce their total borrowing costs by meeting
part of their credit needs at the discount window
(hence borrowing less from the market). This logic
may help to account for why some banks took
loans at the TAF during the GFC without an evident
immediate need for that liquidity.

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Conclusion
Stigma has been thought to affect government credit
programs since at least the Great Depression.16 The
Fed’s discount window, one of these programs, is
often thought to be less effective as a result. While
the issue of stigma in government credit programs
has long been a concern among policymakers, formal
treatments of the problem have become available
only recently. The lessons from such contributions
seem to indicate that the logic behind the idea of
stigma is more complex than previously recognized.
These recent efforts to develop fully specified, rational, and consistent explanations of the phenomenon
constitute a useful foundation from which to build
a better understanding of how stigma operates in
practice and what, if anything, needs to be done to
address it.
Huberto M. Ennis is group vice president for macro
and financial economics and David A. Price is an
editor in the Research Department at the Federal
Reserve Bank of Richmond.

of Money, Credit and Banking, October 2019, vol. 51, no. 7,
pp. 1737–1764.
6

O
 livier Armantier, Helene Lee, and Asani Sarkar, “History of
Discount Window Stigma,” Liberty Street Economics blog,
August 10, 2015.

7

B
 en S. Bernanke, Timothy F. Geithner, and Henry M. Paulson
Jr., Firefighting: The Financial Crisis and Its Lessons. New York:
Penguin Books, 2019, pp. 42–43; Timothy F. Geithner, Stress
Test: Reflections on Financial Crises. New York: Crown Publishers, 2014, p. 141.

8

S ee Bernanke, Geithner, and Paulson (2019), pp. 90–91;
Geithner (2014), pp. 235–238. See also Yeon-Koo Che, Chongwoo Choe, and Keeyoung Rhee, “Bailout Stigma,” Manuscript,
February 2, 2018, for a theoretical study of stigma in the
context of a program such as TARP.

9

O
 livier Armantier, Eric Ghysels, Asani Sarkar, and Jeffrey
Shrader, “Discount Window Stigma during the 2007–2008 Financial Crisis,” Journal of Financial Economics, November 2015,
vol. 118, no. 2, pp. 317–335. For an overview of work addressing the evidence of stigma before and during the GFC, see also
Huberto M. Ennis and Renee Haltom, “Is There Stigma Associated with Discount Window Borrowing?” Federal Reserve Bank
of Richmond Economic Brief No. 10-05, May 2010.

10

S ee, for example, David Benoit, “JPMorgan Won’t Shun the
Fed’s Discount Window Anymore,” Wall Street Journal, February 25, 2020.

11

S ee Board of Governors of the Federal Reserve System, “Federal Reserve Actions to Support the Flow of Credit to Households and Businesses,” press release, March 15, 2020. The
spread between the Primary Credit interest rate and the target
federal funds rate, set by policymakers, has varied over time.
It was 100 basis points before the GFC, then the Fed reduced
it to 50 basis points in August 2007 during the crisis and cut
it further to 25 basis points in March 2008 before raising it
back to 50 basis points in February 2010. See also Board of
Governors of the Federal Reserve System, “Credit and Liquidity
Programs and the Balance Sheet.”

12

S ee, for example, Ben S. Bernanke and Janet Yellen, “The Federal Reserve Must Reduce Long-Term Damage from Coronavirus,” Financial Times, March 18, 2020.

13

S tewart C. Myers and Nicholas S. Majluf, “Corporate Financing
and Investment Decisions When Firms Have Information that
Investors Do Not Have,” Journal of Financial Economics, June
1984, vol. 13, no. 2, pp. 187–221.

14

T homas Philippon and Vasiliki Skreta, “Optimal Interventions
in Markets with Adverse Selection,” American Economic Review,
February 2012, vol. 102, no. 1, pp. 1–28.

15

H
 uberto M. Ennis and John A. Weinberg, “Over-the-Counter
Loans, Adverse Selection, and Stigma in the Interbank Market,”
Review of Economic Dynamics, October 2013, vol. 16, no. 4,
pp. 601–616. A description of the model is given in Ennis and
Haltom (2010).

16

T he Depression-era Reconstruction Finance Corporation,
established in 1932, served as lender of last resort to banks

Endnotes
1

See Huberto M. Ennis and John A. Weinberg, “The Role of Central Bank Lending in the Conduct of Monetary Policy,” Federal
Reserve Bank of Richmond Economic Brief No. 16-12, December 2016. The brief also explains the role that the discount
window can play in monetary policy implementation based
on a so-called channel system.

2

T o make such inferences less possible, the Fed announced
changes on March 19, 2020, to the reporting of loans taken
by depository institutions, including discount window loans.
Such loans are to be consolidated into a larger category,
“Securities, unamortized premiums and discounts, repurchase
agreements, and loans.” The Fed stated, “This modification
supports the Federal Reserve’s goal, expressed in its statement
on March 15, 2020, of encouraging depository institutions to
use the discount window to help meet demands for credit
from households and businesses, including needs related to
the spread of the coronavirus.” See Board of Governors of the
Federal Reserve System, “Changes to Factors Affecting Reserve
Balances – H.4.1,” March 19, 2020.

3

S ee, for example, Bill Nelson, “Design Challenges for a Standing Repo Facility,” Bank Policy Institute blog, August 13, 2019.

4

 andal K. Quarles, “The Economic Outlook, Monetary Policy,
R
and the Demand for Reserves,” remarks to the Money Marketeers of New York University, February 6, 2020.

5

 uberto M. Ennis, “Interventions in Markets with Adverse
H
Selection: Implications for Discount Window Stigma,” Journal

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that were not members of the Fed; banks that borrowed
from it appear to have been stigmatized in financial markets.
See Sriya Anbil, “Managing Stigma during a Financial Crisis,”
Journal of Financial Economics, October 2018, vol. 130, no. 1,
pp. 166–181.

This article may be photocopied or reprinted in its
entirety. Please credit the authors, source, and the
Federal Reserve Bank of Richmond and include the
italicized statement below.
Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

FEDERAL RESERVE BANK
OF RICHMOND
Richmond Baltimore Charlotte

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