“Revisiting the role of central banks as liquidity providers – old and new challenges” with Johan Molin (Sveriges Riksbank), The Sveriges Riksbank Economic Review 2016:2, September 2016.
This article offers a review of the role of central banks as providers of public liquidity. Against the backdrop of the global financial crisis of 2007-2009, we discuss various challenges for public liquidity provision and the effectiveness of central bank lending facilities. These challenges help us identify potential gaps in existing mechanisms and frameworks governing liquidity assistance. We discuss how the available liquidity policy tool kit can be used to deal with the challenges. Furthermore, we highlight modifications to existing central bank facilities during and after the global financial crisis. We point at trade-offs faced by policy makers and describe potential pitfalls for public liquidity providers. Lastly, we attempt to look ahead and outline some specific challenges posed by more recent structural, regulatory, and technological developments in the financial system.
- Keywords: central bank liquidity assistance, liquidity provision, liquidity policy, Great Financial Crisis.