Philip N Jefferson: Liquidity facilities - purposes and functions

Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the 2025 Financial Markets Conference "Financial intermediation in transition: how will policy adapt?", sponsored by the Federal Reserve Bank of Atlanta, Fernandina Beach, Florida, 19 May 2025.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you, President Bostic, for that kind introduction and for the opportunity to talk to this group today. I am delighted to be here, and I look forward to discussions at this important conference.

The theme of today's conference is developments in financial intermediation and potential implications for monetary policy. As this conference embarks on a larger discussion of the role of banks and nonbanks in various market segments-including credit markets, Treasury and money markets, and payments-I believe it is worth taking a step back to explore an important background factor, which is how and why central banks provide liquidity.

The provision of liquidity by central banks is a foundational element of financial intermediation. Central banks should be able to provide liquidity effectively for the financial system to function smoothly. Today, I will take this opportunity to discuss some aspects of liquidity provision by the central banks. Of course, the main forms of liquidity provided by central banks-namely, currency and bank reserves-are the foundation of safe liquidity in the economy. It is vital for a central bank to make clear that it stands ready to provide liquidity should stress emerge. But a central bank must also take steps to minimize moral hazard. "Moral hazard" in this context refers to the concern that publicly provided liquidity might encourage private financial institutions to take on excessive risk.

What I would like to focus on in this speech are two types of liquidity provision that aim to reduce the frictions associated with the basic operations of banks. The first type of liquidity is intraday credit, which is key in handling payment system frictions during the day, and the second one is overnight credit, which deals with a range of frictions. I will also highlight some design features of broadly similar liquidity facilities in three other advanced economies: the U.K., Japan, and the euro area. I believe it is valuable to look at other central banks' experiences with liquidity provision, which entails recognizing the important differences that exist across jurisdictions and mandates and considering what lessons can be learned.