The Federal Reserve Bank of New York today released Central Bank Liquidity Tools and Perspectives on Regulatory Reform, a special issue in the Bank’s Economic Policy Review series.
A consistent theme of the financial crisis that emerged in 2007 was the paralyzing effect caused by the disappearance of liquidity. In response, the Fed and other central banks expanded their traditional roles by developing and implementing new tools to address liquidity shortages in various markets. The first three papers in the special Review focus on understanding the causes and symptoms of liquidity shortages better, and the actions taken by central banks to alleviate those shortages.
The three other papers provide perspectives on how the post-crisis financial system could be designed. These studies propose measures for minimizing risk in financial markets by enhancing the availability of information, incorporating systemic risk into deposit insurance premiums, and addressing “the leverage cycle.” Overall, the studies suggest that the post-crisis financial system will not resemble the pre-crisis system, as market participants and regulators adjust to a variety of new issues.
Included research papers:
“Central Bank Tools and Liquidity Shortages”
Bank for International Settlements researchers Stephen Cecchetti and Piti Disyatat consider the implications of recent financial developments for the “lender-of-last-resort” function of central banks and whether traditional policymaking tools remain effective in the face of modern liquidity crises.
“Provision of Liquidity through the Primary Credit Facility during the Financial Crisis: A Structural Analysis”
Professors Erhan Artuç and Selva Demiralp of Koç University, Turkey, investigate whether changes to the Federal Reserve’s discount window borrowing facility represent a shift in how the nation’s central bank traditionally provided liquidity through the primary credit facility as well as whether the Fed would benefit from retaining these changes indefinitely.
“Financial Amplification Mechanisms and the Federal Reserve’s Supply of Liquidity during the Financial Crisis”
New York Fed economists Asani Sarkar and Jeffrey Shrader examine the Federal Reserve’s recent liquidity actions in the context of studies on financial amplification mechanisms, whereby an initial financial sector shock triggers substantially larger shocks elsewhere in the sector and in the broader economy.
“Informational Easing: Improving Credit Conditions through the Release of Information”
Economist Matthew Pritsker of the Board of Governors of the Federal Reserve System offers a theoretical view on how regulators can reduce uncertainty in the financial markets by improving the availability of information.
“Systemic Risk and Deposit Insurance Premiums”
Professor Viral Acharya of the London Business School and New York University collaborates with New York Fed economists João Santos and Tanju Yorulmazer to analyze various ways to incorporate systemic risk into deposit insurance premiums.
“Solving the Present Crisis and Managing the Leverage Cycle”
Yale University professor John Geanakoplos discusses implications of “the leverage cycle”—a phenomenon in which leverage is excessive prior to a financial crisis and unacceptably low during the crisis—for regulatory policy and reform.