Market Liquidity Programs: GFC and Before

Abstract

The virulence of the Global Financial Crisis of 2007–09 (GFC) was explained in large part by the increased reliance of the global financial system on market-based funding and the lack of preexisting tools to address a disruption in that type of system. This paper surveys market liquidity programs (MLPs), which we define as government interventions in which the key motivation is to stabilize liquidity in a specific wholesale funding market that is under stress. Most of the MLPs surveyed in this paper were launched during and after the GFC, but two pre-GFC MLPs are included. A subsequent survey on MLPs in response to the COVID-19 crisis is forthcoming. MLPs focus on markets that a central bank believes are critical to financial stability. Stress in these markets could be interfering with monetary policy transmission or disrupting the smooth flow of credit to the real economy. MLPs depart from traditional central bank responses to a systemwide liquidity crisis. MLPs have used a variety of techniques that central bankers would typically consider nonstandard for the purpose of promoting liquidity in wholesale funding markets. These include (1) targeted lender-of-last resort activities, (2) lending securities for securities, (3) lending cash for securities, (4) largescale asset purchases, (5) targeted asset purchases, and (6) indirect asset purchases.

Keywords: market liquidity, wholesale funding, market-based funding, financial stability