Liquidity Risk, Credit Risk, and the Federal Reserve’s Responses to the Crisis
Financial Markets and Portfolio Management, Vol. 23, No. 4, pp. 335-348, 2009
Posted: 19 Jun 2010
Date Written: October 13, 2009
In responding to the severity and broad scope of the crisis, the Federal Reserve (the Fed) has aggressively utilized both traditional monetary policy instruments, as well as innovative tools to provide liquidity. In this paper, the Fed’s actions are examined in light of the evolution of risk during the crisis. The empirical evidence supports the Fed’s views on the primacy of liquidity constraints in the earlier stages of the crisis and the increased prominence of counterparty credit risk as the crisis evolved in 2008. I conclude that an understanding of the prevailing risk environment is necessary to evaluate when central bank programs are likely to be effective and under what conditions the programs might cease to be necessary.
Keywords: Crisis, The Federal Reserve, Liquidity facilities, Credit risk
JEL Classification: G00, G01, G10, G20
Suggested Citation: Suggested Citation