The Fed's Discount Window in "Normal" Times

Ennis, Huberto M.; Klee, Elizabeth C.

doi:10.17016/FEDS.2021.016r1

Working Paper Revision

The Fed's Discount Window in "Normal" Times

Abstract: We study transaction-level data of bank borrowings at the Federal Reserve’s discount window from 2010 to 2019. We merge these data with quarterly information on bank balance sheets and income statements. To aid in the interpretation of our empirical analysis, we also develop a detailed model of the decision of banks to borrow from various sources, including the discount window. The objective is to contribute to a better understanding of the reasons why banks use the discount window during “normal” times—periods of relative calm in financial markets. Consistent with our model, we find that borrowing from the discount window is tightly linked to the composition of banks’ balance sheets. Most importantly, banks holding less reserves tend to borrow more often (and more) from the Fed’s discount window. Similarly, banks with more expensive and fragile liabilities, and less marketable collateral, are also more likely to borrow from the Fed.

JEL Classification: E52; E58; G28;

https://doi.org/10.17016/FEDS.2021.016r1