Liquidity – New Risks In Uncertain Conditions

For the past 15 years at least central banks around the world have been pushing “just-in-time” intraday liquidity as the preferred method of banks funding their real-time settlement (RTGS) accounts. While the implementation of RTGS took the settlement risk out of the majority of financial systems, it adoption and use for more and more critical financial systems (such as CLS) has exacerbated another problem – liquidity risk. This weakness has been spotlighted by t the liquidity crises that affected markets in March 2008 and, more severely, in September and October 2008. It can no longer be taken for granted that just-in-time liquidity will be available to financial market utilities at a time when multiple market participants are in danger of defaulting. This is the findings of researcher made public in the “Chicago Fed Letter” (see http://www.chicagofed.org/publications/fedletter/cflnovember2009_268a.pdf )