Fighting Crises with Secrecy

How does central bank lending during a crisis restore confidence? Emergency lending facilities which are opaque (in that names of borrowers are kept secret) raise the perceived average quality of bank assets in the economy, creating an information externality that prevents runs. Stigma (the cost of a bank’s participation at the lending facility becoming public) is desirable to implement opacity as an equilibrium outcome, as no bank wants to reveal its participation status. The central bank’s key policy instrument for limiting the use of lending facilities while maintaining secrecy is the haircut applied to bank assets used as collateral. ⇤We thank Simon Gilchrist (editor), two anonymous referees, Huberto Ennis, Mark Gertler, Todd Keister, Pamela Labadie, Ricardo Reis, Eric Rosengren, Geoffrey Tootell, and seminar participants at the Boston Fed, Wharton, the AEA Meetings in Boston, the NAESM in Philadelphia, the SED Meetings in Toulouse and the “Innovations in Central Banking” Conference at the St. Louis Fed for comments and suggestions. This paper previously circulated under the title “How Central Banks End Crises.” The usual waiver of liability applies. †Yale University and NBER (e-mail: gary.gorton@yale.edu) ‡University of Pennsylvania and NBER (e-mail: ordonez@econ.upenn.edu)