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Lessons from the Use of Extraordinary Central Bank Liquidity Facilities

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The recent crisis was characterized by widespread deterioration in funding conditions, as well as impairment of the mechanism through which liquidity is normally redistributed within the financial system. Central banks responded with extraordinary measures. This article examines the provision of liquidity by central banks during the crisis as they adapted their existing facilities and introduced new ones, while encouraging a return to private markets and mitigating moral hazard. A review of this experience illustrates the importance of clear principles for intervention, a flexible operating framework, and clear communication and co-operation by central banks. By exposing the degree of interdependence of financial institutions and markets the crisis highlighted the need for reforms aimed at improving the infrastructure supporting core funding markets and the liquidity of individual institutions.

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  • Stéphane Lavoie & Alex Sebastian & Virginie Traclet, 2011. "Lessons from the Use of Extraordinary Central Bank Liquidity Facilities," Bank of Canada Review, Bank of Canada, vol. 2011(Spring), pages 27-36.
  • Handle: RePEc:bca:bcarev:v:2011:y:2011:i:spring11:p:27-36
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    Cited by:

    1. Marc Dobler & Simon T Gray & Diarmuid Murphy & Bozena Radzewicz-Bak, 2016. "The Lender of Last Resort Function after the Global Financial Crisis," IMF Working Papers 16/10, International Monetary Fund.
    2. Jason Allen & Ali Hortaçsu & Jakub Kastl, 2011. "Analyzing Default Risk and Liquidity Demand during a Financial Crisis: The Case of Canada," Staff Working Papers 11-17, Bank of Canada.

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