Designing frameworks for central bank liquidity assistance: addressing new challenges
Report submitted by a Working Group established by the Committee on the Global Financial System. The Group was chaired by Hiroshi Nakaso (Bank of Japan).
Opening remarks by Hiroshi Nakaso, Deputy Governor of the Bank of Japan, for the media briefing on 6 April 2017.
Liquidity assistance (LA) operations that took place during the 2007-09 Global Financial Crisis presented central banks with a number of challenges. Notwithstanding important changes in the institutional and regulatory landscape, some of these challenges remain in place, and lessons drawn from the crisis experience remain highly relevant. Above all that LA should be provided swiftly but only when there is a clearly identifiable liquidity problem and when other tools are not available. It should also be supplied in ways that keep moral hazard to a minimum.
This report considers three issues in particular: the provision of LA to internationally active financial intermediaries; transparency about LA; and the provision of LA to a market. The overarching message is the need to prepare in calm times to be able to provide LA effectively in times of stress. A set of principles articulate this general message in the context of specific challenges. The first six principles relate to the fact that central banks may be called to work closely with each other when providing LA to an internationally active financial intermediary. Central banks need to consider how the interaction of their frameworks for providing LA affects how they can most effectively coordinate their LA operations. Each central bank's responsibilities are likely to depend on a number of factors, ranging from those that can (and should) be assessed in advance to those largely dependent on circumstances prevailing at the time LA is considered. In terms of transparency, central banks should bear in mind the trade-offs between transparency, which strengthens accountability, and the need for flexibility in the timing of disclosures to promote financial stability. Finally, central banks should seek to better understand the implications of the evolution of market-based forms of financial intermediation, as these channels are likely to play a key role in future episodes of systemic stress.
JEL classification: E58, G10, G20, H12
Keywords: Financial stability, lender of last resort, crisis management, international cooperation, transparency