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

See all articles by Mehdi Beyhaghi

Mehdi Beyhaghi

Board of Governors of the Federal Reserve System

Jeffrey R. Gerlach

Federal Reserve Bank of Richmond

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

Beyhaghi, Mehdi and Gerlach, Jeffrey R., How Banking Supervision Hinders the Federal Reserve’s Mission as the Lender of Last Resort (August 26, 2022). Available at SSRN: https://ssrn.com/abstract=3999968 or http://dx.doi.org/10.2139/ssrn.3999968

Mehdi Beyhaghi (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jeffrey R. Gerlach

Federal Reserve Bank of Richmond ( email )

530 E Trade Street
Charlotte, NC 28202
United States
704-358-2517 (Phone)

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