Tag: financial crisis

New research from Olin may redeem and restore the word “bailout” that became a dirty word during the 2008 financial crisis, according to Dave Nicklaus, columnist at the St. Louis Post-Dispatch.

“Jennifer Dlugosz, assistant professor of finance at the Olin Business School, and two co-authors looked at a pair of Federal Reserve programs that were pumping $221 billion a day into banks at the height of the crisis.

What they found should be heartening for the Fed and its defenders: For each dollar in emergency support, large banks lent an additional 60 cents and small banks lent 30 cents.”    Link to St. Louis Post Dispatch.

Nicklaus also notes, “The names of banks that took emergency loans used to be secret, but two news organizations sued and forced the Fed to disclose the recipients. Dlugosz believes her study is the first to use the resulting data.”

During the financial crisis from 2007-09, the U.S. Federal Reserve took drastic steps to ensure that banks had access to liquidity so they could continue lending. It extended the maturity of loans available through its Discount Window from overnight to 90 days, and established the Term Auction Facility, which offered similar funding through a series of special auctions.  Banks borrowed from these facilities to the tune of a staggering $221 billion per day during the crisis.

For the first time ever, Olin Professor Jennifer Dlugosz and her co-researchers, were able to examine data from the crisis to show how the Fed can effectively assist banks in times of financial uncertainty. No matter the program or the bank size, this infusion of liquidity spurred lending that ultimately reached homes and businesses, thereby benefiting the economy, the researchers found in their analysis.

Jennifer Dlugosz, assistant professor of finance at Olin Business School

Jennifer Dlugosz, assistant professor of finance at Olin Business School

“Perhaps contrary to popular beliefs, our research shows that the Fed’s actions were effective in encouraging banks to lend. This suggests that the credit crunch we witnessed could have been a lot worse in the absence of these facilities,” said Jennifer Dlugosz, assistant professor of finance at Olin Business School, and former economist at the Board of Governors of the Federal Reserve System.

Dlugosz — along with co-authors Allen Berger, professor of banking and finance at the University of South Carolina, Lamont Black, assistant professor of finance at DePaul University, and Christa Bouwman, associate professor of finance at Texas A&M University — analyzed data about the banks that took part in the Fed’s financial crisis programs. In the past, the information had not been released due to concerns about the stigma associated with accepting the assistance. However, the data became public in 2010 after media outlets Bloomberg News and Fox Business Network filed a Freedom of Information Act request.

“No one has been able to look at this question before, because the data weren’t available,” Dlugosz said. “This is the first time in history that detailed data on the individual loans has been made public.”

During the course of their research, Dlugosz and her co-authors found a total of 20 percent of small U.S. banks and 62percent of bigger U.S. banks — more than 2,000 in all — used the Discount Window or the Term Auction Facility at some point during the crisis. The access to liquidity increased bank lending of almost all types. Meanwhile, they found no evidence that banks were making riskier loans.

“We examined whether or not the Discount Window and the Term Auction Facility helped encourage banks to lend during the crisis,” Dlugosz said. “We find that it did. It looks like one extra dollar in liquidity support from the Fed to a bank results in somewhere between 30 to 60 cents in additional lending by the bank, depending on its size.

“It wasn’t obvious at the time whether this was going to work. The Fed is a lender of last resort for banks. We already had some idea it was effective in preventing bank failures, but this paper also shows us it can also be useful in encouraging banks to lend.”

The research paper was recently accepted for publication by the Journal of Financial Intermediation.

By: Erika Ebsworth-Goold, WashU The Source

New research from Anjan Thakor, John E. Simon Professor of Finance, identifies conditions and activity in the banking industry that point to an impending financial crisis. In an interview with Steven Richmond editor-in-chief of BadCredit.org, Thakor discusses his new research:

Thakor identified several events that could mean a financial collapse is on its way:

  • A long period of low defaults and sustained profitability in banking
  • Politicians pressuring banks to lend more aggressively
  • Aggressive growth in bank balance sheets coupled with a lowering of capital ratios
  • Shortening debt maturity in bank borrowing
  • An asset price boom in any given sector banks lend to (i.e., real estate)
  • A financial system flush with liquidity, due in part to relaxed monetary policies

“The model is not about identifying the exact timing of the next crisis, but the pre-crisis conditions it identifies match what we had in the last crisis and previous ones,” Thakor said.


Anjan Thakor

Thakor’s research paper, “Lending Booms, Smart Bankers and Financial Crises,” will be published in the American Economic Review 2015.





Image: Banking, Got Credit, Flickr Creative Commons

Bankrate, June 30, 2014: “Study: Fed actions worked during meltdown.” Prof. Jennifer Dlugosz’s research on the role of the Federal Reserve in the aftermath of the 2008 financial crisis is covered in a Q&A with Prof. Dlugosz.

Jennifer Dlugosz, assistant professor of finance at Olin Business School

Jennifer Dlugosz, assistant professor of finance at Olin Business School







Image: Kevin Dooley: Newswave (news banner lights, time-lapse in Times Square, New York City), Flickr Creative Commons


Contrary to popular belief, the Federal Reserve’s effort to encourage banks’ lending during the recent financial crisis by providing them short-term loans worked — and, in fact, worked quite well — a new study finds.

Dlugosz, JenniferJennifer Dlugosz, PhD, assistant professor of finance at Washington University in St. Louis’ Olin Business School, worked with colleagues Allen Berger, of University of South Carolina; Lamont Black, of DePaul University; and Christina Bouwman, of Case Western Reserve University.

Examining novel data released after the crisis, they found that banks’ increased use of the Fed’s Discount Window and Term Auction Facility (TAF) was associated with increased lending to firms and households.

They explain their findings in a recent working paper, “The Federal Reserve’s Discount Window and TAF Programs: ‘Pushing on a String?’” available through the Social Science Research Network.

“There were many news reports during that time that banks were hoarding cash from government interventions and keeping it for themselves,” Dlugosz said. “Our results show, at least in the context of these programs, that was not the case. Banks that received funds did increase their lending.”

Since its inception, the Federal Reserve has served as a “lender of last resort” to the banking system,via the Discount Window, by providing temporary, short-term funding to solvent banks experiencing liquidity problems.

In 2007-08, as concerns about subprime mortgages grew, banks found their usual market sources of funding more difficult to come by. In response, the Federal Reserve extended Discount Window loans, reduced the cost of credit and established the Term Auction Facility, which aimed to provide funds in an auction format, to stabilize the financial system and increase banks’ lending.

Dlugosz and her co-authors set out to see if this effort worked.

Their study answers three questions:

  • Which banks used funds from the Federal Reserve during the crisis?
  • Did these funds substitute for or complement other funding sources?
  • Did banks use these funds to increase their lending?

Despite the long history of the Fed’s role as a lender of last resort, these questions have not been studied previously because the banks receiving funds from the Federal Reserve historically have been kept secret. Information on crisis-time borrowing only became public due to disclosure requirements in the Dodd-Frank Act and Freedom of Information Act requests by Bloomberg News and Fox Business Network.

Dlugosz and her co-authors found that Discount Window and TAF use was widespread. Twenty percent of small banks and more than 60 percent of large banks took advantage of the programs. Some banks relied on the Fed quite heavily, with top borrowers using these programs to fund as much as 5 to 15 percent of assets daily, on average, over the crisis period.

For small and large banks alike, an increase in Discount Window and TAF funding from the Fed was associated with increased lending. Those results held for both short-term and long-term loans, and for virtually all types of lending aside from residential real estate lending.

A common criticism of government support is that it creates “moral hazard.” In other words, there is concern that banks expecting to receive government support will take more risk than they otherwise would.

However, using detailed data on borrower quality and lending terms that’s available for a subset of banks in the sample, the study found loan quality stayed the same or improved while contract terms remained unchanged.

by Neil Schoenherr, WUSTL News

Image: Federal Reserve Eccles Building, 1937