There are nonetheless three major sources of concern about potential weaknesses in the new framework for financial crisis management that has been introduced since the Great Financial Crisis. The first is its failure to resolve the problem of stigma--that is, the stigma of borrowing from the central bank at a time when the financial markets are on guard, looking for signs of weakness in individual financial institutions at a time of overall financial stress. Indeed, some of the Dodd-Frank Act reporting requirements may worsen the stigma problem.

The second is a concern that arises from the nature of financial and other crises. It is essential that we build strong frameworks to deal with potential crisis situations, and Dodd-Frank has done that. But these plans need to ensure that the authorities retain the capacity to deal with unanticipated events, for unanticipated events are inevitable. Retaining the needed flexibility may conflict with the desire to reduce moral hazard to a minimum. But, in simple language: Strengthening fire prevention regulations does not imply that the fire brigade should be disbanded.

Third, this concern is heightened by a related problem: The new system has not undergone its own stress test. That is, in one sense, fortunate, for the financial system will undergo its fundamental stress test only when we have to deal with the next potential financial crisis. That day will likely come later than it would have without Dodd-Frank and the excellent work done by regulators in the United States and around the world in strengthening financial institutions and the financial system. But it will come, and when it comes, we will need the flexibility required to deal with it.

Under a framework established by the [Dodd-Frank] act, the Federal Reserve will, by December 1, provide detailed information regarding individual transactions conducted across a range of credit and liquidity programs over the period from December 1, 2007, to July 20, 2010. This information will include the names of counterparties, the date and dollar value of individual transactions, the terms of repayment, and other relevant information. On an ongoing basis, subject to lags specified by the Congress to protect the efficacy of the programs, the Federal Reserve also will routinely provide information regarding the identities of counterparties, amounts financed or purchased and collateral pledged for transactions under the discount window, open market operations, and emergency lending facilities. 

In theory, it is the higher rate that keeps banks from using the discount window as a regular source of funds. In practice, bankers are quite suspicious that borrowing from the Federal Reserve will bring additional regulatory scrutiny. In my banking days, I always described it as being like borrowing from my father. I was always sure that at some point I would have to answer uncomfortable questions.

Indeed, one of the important practical difficulties that confronted the Federal Reserve early in the crisis--and one that appears not to have been anticipated by Bagehot--was the unwillingness of many banks to draw discount window credit because of concerns about stigma.
That unwillingness threatened to undermine the effectiveness of central bank action to combat the crisis. And it was an important motivation behind the decision of the Federal Reserve to establish the Term Auction Facility (TAF) as a means of providing a large volume of term funding to banks through an auction mechanism. The Federal Reserve expected that providing funds through an auction, in which no individual institution can have any assurance of winning funds and where settlement takes place with a lag, would have much less stigma than a standing facility.