This paper models the impact of the discount window on decisions of individual banks facing regulatory capital requirements and stochastic deposit supply. A central result is that banks may choose a larger lending capacity if the discount window is available than if it is not. Moreover, if the cost of capital is higher during recessions, banks may then avoid the window, contributing to the downturn. A discontinuous interaction emerges between risk-based capital requirements and use of the discount window, with a more stringent capital requirement inducing some banks to hold less capital.

This paper explores empirical linkages between credit unions’ (CUs’) policies and their financial performance, as measured by loan delinquency and profitability, using a unique micro dataset of credit unions in three Latin American countries. The estimated translog profit function is generalized using a slack variable concept that parameterizes any systematic deviation from profit-maximizing behavior exhibited within the sample. In general, we find that performance depends in important ways on two types of CU policy variables, some associated with the incentives of borrowers to repay and others that affect the CU’s ability to screen loans.