Bis Report

Topics: Central bank, Monetary policy, Foreign exchange market Pages: 59 (17919 words) Published: June 7, 2013
The Chair

Mr Jean-Claude Trichet Chairman of the Global Economy Meeting President European Central Bank Postfach 16 03 19 60066 Frankfurt am Main Germany

1 September 2011

Draft CGFS report on Global Liquidity Dear Jean-Claude In my capacity as Chairman of the Committee on the Global Financial System (CGFS), I am circulating to the Global Economy Meeting a draft report on Global liquidity – concept, measurement and policy implications. The report, which follows up on a request by ECC Governors, was prepared by an Ad-hoc Group on Global Liquidity, chaired by Jean-Pierre Landau of the Banque de France. I would propose that Mr Landau present the report to the September Global Economy Meeting. The report will also be discussed at the 11 September CGFS meeting; any additional insights from the discussion will be highlighted at the Global Economy Meeting. The report was written against the backdrop of ongoing work at the G20. It proposes to approach policy responses to global liquidity in the context of two distinct liquidity concepts. One is private (or private sector) liquidity and is closely associated with liquidity surges and related build-ups of risk. Responses to private liquidity are linked with micro- and macroprudential policies as well as the financial reform agenda. The second concept is official (or public sector) liquidity and relates to situations of liquidity shortage or disruptions in the provision of liquidity in private markets. Policy considerations in this area are primarily related to discussions about precautionary foreign exchange reserves holdings, central bank swap lines, and other tools for the international distribution of official liquidity. The report argues that the financial reform agenda and evolving macroprudential policy frameworks are working toward reducing the vulnerabilities associated with global liquidity cycles, both through enhanced resilience and reduced procyclicality. Additional policy action may be needed at both the domestic and international levels to fully deal with both surges and disturbances of global liquidity provision. This implies a key role for central banks as macroprudential and monetary policy makers and through their involvement in banking regulation and supervision. While small-scale or regional shocks to liquidity provision may be addressed through existing arrangements for the international distribution of liquidity, such as IMF programmes, global liquidity shocks will require interventions by institutions with the ability to elastically supply large-scale amounts of official sector liquidity to break downward liquidity spirals. Only central banks have this ability.

Centralbahnplatz 2 · CH-4002 Basel · Switzerland · Tel: +41 61 280 8080 · Fax: +41 61 280 9100 ·


Central banks, working cooperatively through the Basel process, thus remain well placed to address future surges and shortages in global liquidity. The established cooperative process ensures that central banks understand each others’ reaction functions and economic outlooks, thus providing the context within which they can set their own policy. Governors may wish to discuss their perspectives on these conclusions. Subject to approval by the Global Economy Meeting, we propose sending the report to G20 Governors and Finance Ministers after incorporating Governors’ comments. Yours sincerely

Mark Carney Copy: Governors of the Global Economy Meeting

Centralbahnplatz 2 · CH-4002 Basel · Switzerland · Tel: +41 61 280 8080 · Fax: +41 61 280 9100 ·


1 September 2011

CGFS Ad-hoc Group on Global Liquidity: Global liquidity – concept, measurement and policy implications Draft final report – for discussion by the CGFS and Governors on 11–12 September 2011

1. Introduction Global liquidity has become a key focus of international policy debates over recent years. This reflects the view that global liquidity and its drivers are of major importance for...
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