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Central Bank Liquidity Policy in Modern Times. Central banks play a crucial role in promoting financial stability. They act as financial system stabilizers through their capacity to create liquidity and channel it to financial institutions and markets in times of stress—a role that has evolved and expanded substantially over the past 15 years.
Learn about our market operations and liquidity framework that guides the Bank as it reinforces the target for the overnight rate, supports efficient financial markets and provides liquidity to the financial system. To carry out its monetary policy and financial system functions, the Bank undertakes a range of financial market operations and ...
2020-01-15. This Guideline sets out prudential considerations relating to the liquidity risk management programs of federally regulated deposit-taking institutions and bank holding companies. In this Guideline, the term "institution" means banks, all federally regulated trust and loan companies, and bank holding companies.
- Introduction
- Central Bank Liquidity Measures: Pre-Crisis
- Liquidity and Monetary Policy
- Five Principles to Guide Extraordinary Liquidity Intervention
- Liquidity Measures to Address The Financial Market Turmoil
- Liquidity Facilities: The Present
- Future: Dealing with Moral Hazard and The Provision of Liquidity
- Conclusion
Thank you for inviting me here today. It is a pleasure to be with you. This afternoon, I would like to talk about liquidity and the role of the Bank of Canada. As was unmistakably brought home by the global financial crisis, it is critically important that financial institutions recognize and manage liquidity risk and, at the end of the day, it is ...
Prior to the crisis, the tools used by the Bank to provide liquidity to the financial system as a whole were measures designed primarily to reinforce our target for the overnight interest rate. 4 These tools were—and still are—part of the Bank of Canada’s standard operating framework for the implementation of monetary policy. The main facility we u...
In normal times, including just prior to the crisis, the focus of the Bank’s liquidity measures was on supporting our monetary policy stance. Liquidity actions were designed and intended to affect aggregate levels of liquidity (often just intraday) to achieve our overnight rate target, rather than the distribution of liquidity within the system. Th...
As global financial markets became more turbulent in the summer of 2007, central banks around the world realized that unusual measures might be necessary to provide liquidity to support financial stability. The Bank of Canada developed and then published in the spring of 2008 a set of five principles to guide its liquidity interventions. These prin...
Guided by these then newly developed principles, the Bank gradually expanded its liquidity framework in four dimensions: terms to maturity, amounts, counterparties, and eligible securities. 10, 11 The first trigger came in the latter part of 2007 when liquidity in credit markets shrank around the world, including in Canada, with credit spreads risi...
By the spring of last year, as financial market conditions continued to improve, participation in our liquidity operations diminished, indicating that the need for the Bank’s support would likely be declining. Indeed, the amount of liquidity support had peaked at $41 billion in December 2008. (It is currently some $23 billion.) It is important to n...
I would now like to return to the issue of moral hazard. Recall that our fifth principle is the mitigation of the moral hazard associated with our interventions. Having gone through a financial crisis, we can be even more clear on how to do this. How can we minimizethe potential that our actions provide incentives to market players to take increase...
To conclude, the principles developed as the crisis began have served the Bank and, more importantly, the financial system well. Throughout the crisis, the Bank has been innovative and nimble. 27In this period of winding down our temporary facilities, we are acting deliberately and thoughtfully, for example, by providing advance notice and by only ...
Jul 13, 2021 · trigger liquidity risk by causing depositors to run the bank; the empirical suggest that liquidity problems are often triggered by concerns that the bank is insolvent due to poor asset quality (e.g., Gorton, 1988). To improve the bank’s asset portfolio choices and risk management, regulatory monitoring and capital requirements can be used.
Jan 1, 2024 · Inspired by the classic result in Weitzman (1974) on quantity-based versus price-based regulation, we consider a central bank committed liquidity facility (CLF) that allows banks to pay the central bank an upfront fee for a loan commitment. 4 The unused capacity of the loan commitment can be counted toward a bank's liquidity requirements without occupying banks' balance sheets, eliminating the ...
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Jul 11, 2024 · The researchers study how a liquidity shock to one bank impacted the liquidity positions of other banks before and during the COVID-19 pandemic. They find that this shock transmission, or “spillover,” was stronger during the COVID-19 period than the pre-pandemic period, on average. They also find that, on average, connections that can ...
