Why Do U.S. Banks Borrow from the Fed? A Fresh Look at the 'Reluctance' Phenomenon

8 Pages Posted: 1 Jul 2004

See all articles by Ali F. Darrat

Ali F. Darrat

Louisiana Tech University - College of Business

Khaled Elkhal

University of Texas at Brownsville

Gaurango Banerjee

University of Texas at Brownsville

Maosen Zhong

University of Queensland - Business School

Abstract

The role of several theoretical factors in determining the demand of US banks for borrowed reserves from the Fed is empirically investigated. The main objective is to isolate the candidate(s) most likely responsible for the recent observed phenomenon of banks reluctance to borrow from the Fed, particularly since the mid-1980s. The results indicate that the declining number of banks due to mergers and consolidations holds much of the weight for explaining the weakened demand for borrowed reserves since the mid-1980s. Consistent evidence is found suggesting that US banks may have been unlawfully exploiting the discount window service for profit-taking purposes. This finding proves credible and suggests the need for further loan scrutiny at the Federal discount window.

Keywords: Commercial banks, Discount window borrowing, Federal Reserve

JEL Classification: G21, G34

Suggested Citation

Darrat, Ali F. and Elkhal, Khaled and Banerjee, Gaurango and Zhong, Maosen, Why Do U.S. Banks Borrow from the Fed? A Fresh Look at the 'Reluctance' Phenomenon. Applied Financial Economics, Vol. 14, pp. 477-484, 2004, Available at SSRN: https://ssrn.com/abstract=556473

Ali F. Darrat

Louisiana Tech University - College of Business ( email )

Department of Economics & Finance
P.O. Box 10318
Ruston, LA 71272
United States
318-257-3874 (Phone)
318-257-4253 (Fax)

Khaled Elkhal (Contact Author)

University of Texas at Brownsville ( email )

Brownsville, TX 78520
United States

Gaurango Banerjee

University of Texas at Brownsville ( email )

Brownsville, TX 78520
United States

Maosen Zhong

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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