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Tag Archives: Liquidity

A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet

Gara Afonso, Marco Cipriani, Gabriele La Spada, and Will Riordan Aggregate reserves declined from nearly $3 trillion in August 2014 to $1.4 trillion in mid-September 2019, as the Federal Reserve normalized its balance sheet. This decline came to a halt in September 2019 when the Federal Reserve responded to turmoil in short-term money markets, with reserves fluctuating around $1.6 trillion in the early months of 2020. Then, in response to the COVID-19 pandemic, the Federal Reserve...

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Outflows from Bank-Loan Funds during COVID-19

Nicola Cetorelli, Gabriele La Spada, and João Santos The COVID-19 pandemic has put significant pressure on debt markets, especially those populated by riskier borrowers. The leveraged loan market, in particular, came under remarkable stress during the month of March. Bank-loan mutual funds, among the main holders of leveraged loans, suffered massive outflows that were reminiscent of the outflows they experienced during the 2008 crisis. In this post, we show that the flow sensitivity of...

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Combating COVID-19: How Should Banking Supervisors Respond?

By Tobias Adrian  and Ceyla Pazarbasioglu عربي, 中文,  Español, Français,Русский  The massive macro-financial shock caused by the pandemic continues to ravage the global economy and has put both banks and borrowers under severe strain. Supervisors find themselves confronted with unprecedented challenges which call for decisive action to ensure that banking systems support the real economy while preserving financial stability. This blog introduces nine joint IMF-World Bank recommendations to...

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Courage under Fire: Policy Responses in Emerging Market and Developing Economies to the COVID-19 Pandemic

Martin Mühleisen, Vladimir Klyuev, Sarah Sanya The coronavirus crisis is a crisis like no other, and for emerging market and developing economies (EMDE), it has triggered a policy response like no other, both in scope and magnitude. Despite their diversity, and in some cases, strained resources, this large group of countries—consisting of emerging markets and low-income countries—have bolstered the provision of health services and extended unprecedented support to households, firms, and...

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The Primary Dealer Credit Facility

Antoine Martin and Susan McLaughlin This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak. On March 17, 2020, the Federal Reserve announced that it would re-establish the Primary Dealer Credit Facility (PDCF) to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. The PDCF started...

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The Commercial Paper Funding Facility

Nina Boyarchenko, Richard Crump, and Anna Kovner This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak. In mid-March, the Federal Reserve announced a slew of credit and liquidity facilities aimed at supporting credit provision to U.S. households and businesses. Among the initiatives is the Commercial Paper Funding Facility (CPFF) which aims to support...

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The Money Market Mutual Fund Liquidity Facility

Marco Cipriani, Gabriele La Spada, Reed Orchinik, and Aaron Plesset This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak. Over the first three weeks of March, as uncertainty surrounding the COVID-19 pandemic increased, prime and municipal (muni) money market funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation,...

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COVID-19 Crisis Poses Threat to Financial Stability

By Tobias Adrian and Fabio Natalucci عربي, Español, Français, 日本語, Português The COVID-19 pandemic has caused an unprecedented human and health crisis. The measures necessary to contain the virus have triggered an economic downturn. At this point, there is great uncertainty about its severity and length. The latest Global Financial Stability Report shows that the financial system has already felt a dramatic impact, and a further intensification of the crisis could affect global financial...

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How Does Information Affect Liquidity in Over-the-Counter Markets?

Michael Lee and Antoine Martin A large volume of financial transactions occur in decentralized markets that commonly depend on a network of dealers. Dealers face two impediments to providing liquidity in these markets. First, dealers may face informed traders. Second, they may face costs associated with maintaining large balance sheets, either due to inventory or liquidity costs. In a recent paper, we study a model of over-the-counter (OTC) markets in which liquidity is endogenously...

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The Evolving Market for U.S. Sovereign Credit Risk

Nina Boyarchenko and Or Shachar How should we measure market expectations of the U.S. government failing to meet its debt obligations and thereby defaulting? A natural candidate would be to use the spreads on U.S. sovereign single-name credit default swaps (CDS): since a CDS provides insurance to the buyer for the possibility of default, an increase in the CDS spread would indicate an increase in the market-perceived probability of a credit event occurring. In this post, we argue that...

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