Managing Stigma during a Financial Crisis

Abstract

How should regulators design effective emergency lending facilities to mitigate stigma during a financial crisis? I explore this question using data from an unexpected disclosure of partial lists of banks that secretly borrowed from the lender of last resort during the Great Depression. I find evidence of stigma in that depositors withdrew more deposits from banks included on the lists in comparison with banks left off the lists. However, stigma dissipated for banks that were revealed earlier after subsequent banks were revealed. Overall, the results suggest that an emergency lending facility that never reveals bank identities would mitigate stigma. (JEL Codes: G01, G21, G28)

Analysis of Stigma and Bank Credit Provision

“…Following the New York Times publication date, there is a major drop in new applications, and the drop lasts for over a year. Therefore, the applications reported in Figure after August 22, 1932, are mostly from repeat applicants; many of these banks had been revealed to the public and were likely requesting more RFC assistance to combat the deposit withdrawals noted in Anbil (). The drop in new applications indicates that banks that had not already participated in the RFC program were reluctant to get involved—evidence of the program form of the “stigma effect”.…”

“…Mason (), on the other hand, uses a microlevel data set of Federal Reserve member banks and finds that the revealing had positive effects on bank survival. Additionally, Anbil () shows that the presence of stigma imposed an 18%–25% loss in deposit levels at the RFC revealed banks. These results align with the findings of Friedman and Schwartz () who state that when a bank was revealed to have received assistance, it was interpreted as a “sign of weakness and hence frequently led to runs on the bank” (p. 325).…”

Regulatory Reform

“…Gorton & Metrick (2013) trace the stigma versus moral hazard tension to the first 20 years of the Fed, with moral hazard concerns dominating and leading the Fed to discourage borrowing from the discount window in the late 1920s. Anbil (2017) uses a clever natural experiment to show that stigma had a significant negative effect on borrowers from the Reconstruction Finance Corporation during the Great Depression. Stigma-induced reluctance to borrow from the discount window was a continuing problem in the early stages of the GFC, leading to the creation of the Term Auction Facility (TAF), which made use of several design features to minimize stigma.…”

Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma

“…Finally, Anbil () and Vossmeyer () study empirically the incidence and impact of stigma in financial markets during the Great Depression. Anbil () shows that borrowing from the Reconstruction Finance Corporation (RFC), when disclosed, was interpreted by depositors as a signal of bank financial weakness. The paper also identifies possible features of the organization of a lending facility that can help reduce stigma.…”