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. Overall, the results suggest that an emergency lending facility that never reveals bank identities would mitigate stigma.

We examine how the threat of disclosure (stigma) changes the quality of banks that approach emergency lending facilities. We study a financial crisis where two confidential facilities were available to banks. Unexpectedly, a partial list of bank names from one facility was published, suddenly stigmatizing that facility. We find that the composition of banks that approached each facility changed, where the newly stigmatized facility attracted weaker banks that maintained smaller liquidity buffers, while the alternative confidential facility attracted both weaker and stronger banks. Our results shed light on how stigma prevents regulators from reaching many banks to inject critical liquidity into the banking sector during a crisis.

Non-financial corporations typically cite risk management as the primary reason for their derivatives use. If hedging programs are effective, then firms using derivatives should have lower credit risk than those that do not. Consistent with this idea, we find that CDS spreads are lower for firms with derivatives positions that are designated as accounting hedges (typically low basis risk) compared to firms without the accounting hedge designation as well as firms that do not use derivatives. Surprisingly, we find that firms with derivatives positions without a hedge accounting designation have higher CDS spreads than firms that do not hedge with derivatives at all. We do not find evidence that these non-designated positions are associated with future credit realizations, as captured by changes in either credit ratings or CDS spreads. We examine alternative explanations and find evidence that is consistent with a market penalty for high basis risk positions when overall market conditions are poor.

We investigate whether the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF) boosted commercial bank Paycheck Protection Program (PPP) lending. To determine whether this facility had a causal effect, we use pre-existing familiarity with the Federal Reserve’s discount window as an instrumental variable. We show that the PPPLF materially bolstered bank PPP lending and provided a meaningful funding backstop for banks that did not use the facility. Our paper is one of the first to quantitatively illustrate the effectiveness of a central bank facility as a funding backstop.