Ten Propositions About Liquidity Crises

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

March 2010

CESifo Economic Studies, Vol. 56, Issue 1, pp. 70-95, 2010

What are liquidity crises? And what can be done to address them? This short article brings together some personal reflections on this issue, largely based on previous work. In the process, it questions a number of commonly held beliefs that have become part of the conventional wisdom. The article is organized around 10 propositions that cover the following issues: the distinction between idiosyncratic and systematic elements of liquidity crises; the growing reliance on funding liquidity in a market-based financial system; the role of payment and settlement systems; the need to improve liquidity buffers; the desirability of putting in place (variable) speed limits in the financial system; the proper role of (retail) deposit insurance schemes; the double-edged sword nature of liquidity provision by central banks; the often misunderstood role of ‘monetary base’ injections in addressing liquidity disruptions; the need to develop principles for the provision of central bank liquidity; and the need to reconsider the preventive role of monetary (interest rate) policy.

Keywords: market and funding liquidity, liquidity crises, deposit insurance, central bank operations, monetary base

JEL Classification: E50, E51, E58, G10, G14, G18, G28

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Date posted: February 22, 2010  

Suggested Citation

Borio, Claudio E. V., Ten Propositions About Liquidity Crises (March 2010). CESifo Economic Studies, Vol. 56, Issue 1, pp. 70-95, 2010. Available at SSRN: http://ssrn.com/abstract=1555547 or http://dx.doi.org/ifp031

Contact Information

Claudio E.V. Borio (Contact Author)
Bank for International Settlements (BIS) - Research and Policy Analysis ( email )
CH-4002 Basel, Basel-Stadt
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