A new report sets out principles for central banks to consider when providing liquidity assistance in times of stress, especially to large global institutions with operations that reach beyond national borders.
The report, prepared by a working group established by the Committee on the Global Financial System, identifies areas where central banks face common challenges in dealing with liquidity stress. These challenges, which became apparent during the global financial crisis, remain highly relevant despite important changes in the institutional and regulatory landscape.
"The key message throughout the report is that we need to prepare in calm times to be able to provide liquidity assistance effectively in times of stress," said CGFS chair William Dudley, President of the Federal Reserve Bank of New York.
"No central bank can do this alone", said Bank of Japan Deputy Governor Hiroshi Nakaso, who chaired the working group. "We need to consider how our national frameworks for liquidity assistance interact. We must also work closely with regulators, supervisors and resolution authorities. I am confident that this report will provide useful guidance for the next generation of central bankers."
One important lesson from the crisis is that liquidity assistance should be provided swiftly but only when there is a clearly identifiable liquidity problem, and when other tools are unavailable. It should also be supplied in ways that keep moral hazard to a minimum.
Against this background, the report focuses on providing liquidity to internationally active financial intermediaries; being transparent about both the framework for liquidity assistance and about individual operations; and providing support to an entire market.
Next Finance , April 7
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