The Fed operated various liquidity facilities during 2007-10 that were intended to alleviate financial system stress but could have been interpreted as an adverse signal. We analyze the response of the credit default swap market to the announcement and usage of these facilities by European banks. We find that Fed financial assistance tended to reduce market perception of risk if the information was related to Fed’s liquidity policies and increased risk perceptions when the information was more about banks’ riskiness. We also find the facilities reduced the perceived risk of publicly assisted banks but increased the perceived risk of banks that were not assisted.
