How Banking Supervision Hinders the Federal Reserve’s Mission as the Lender of Last Resort
48 Pages Posted: 6 Jan 2022 Last revised: 20 Jul 2023
Date Written: August 26, 2022
Abstract
We discuss the implications of the Federal Reserve’s (Fed’s) dual role as the monetary policy authority and a bank supervisor. Despite claims in the practitioner and academic literature, we do not find evidence that banks are punished by Fed supervisors for borrowing from the Fed. For identification, we exploit a legally determined rotation policy that assigns the Fed and state supervisors to the same bank at exogenously set time intervals. Our results suggest that the conflict between banking supervision and lender of last resort is not inherent, but is an unintended consequence of information asymmetry created by keeping information about banking supervision and central bank lending confidential. We argue there are straightforward policy changes the Fed could make to its lending programs that would eliminate this conflict.
Keywords: Federal Reserve, Lender of last resort, Bank Supervision, Bank Regulation, Discount Window Stigma
JEL Classification: E50, E58, E61, G21, L10
Suggested Citation: Suggested Citation