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Why do US banks borrow from the Fed? A fresh look at the 'reluctance' phenomenon

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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.

Document Type: Research Article


Affiliations: 1: Department of Economics and Finance Louisiana Tech University Ruston Louisiana 71272 USA 2: University of Texas - Brownsville USA 3: The University of Queensland USA

Publication date: 2004-04-01

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