IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/389.html
   My bibliography  Save this paper

Liquidity risk, credit risk, and the Federal Reserve's responses to the crisis

Author

Listed:
  • Asani Sarkar

Abstract

In responding to the severity and broad scope of the financial crisis that began in 2007, the Federal Reserve has made aggressive use of both traditional monetary policy instruments and innovative tools in an effort to provide liquidity. In this paper, I examine the Fed's actions in light of the underlying financial amplification mechanisms propagating the crisis--in particular, balance sheet constraints and counterparty credit risk. The empirical evidence supports the Fed's views on the primacy of balance sheet constraints in the earlier stages of the crisis and the increased prominence of counterparty credit risk as the crisis evolved in 2008. I conclude that an understanding of the prevailing risk environment is necessary in order to evaluate when central bank programs are likely to be effective and under what conditions the programs might cease to be necessary.

Suggested Citation

  • Asani Sarkar, 2009. "Liquidity risk, credit risk, and the Federal Reserve's responses to the crisis," Staff Reports 389, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:389
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr389.html
    Download Restriction: no

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr389.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    2. Guidolin, Massimo & Tam, Yu Man, 2013. "A yield spread perspective on the great financial crisis: Break-point test evidence," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 18-39.
    3. Fratzscher, Marcel & Lo Duca, Marco & Straub, Roland, 2012. "A global monetary tsunami? On the spillovers of US Quantitative Easing," CEPR Discussion Papers 9195, C.E.P.R. Discussion Papers.
    4. Fratzscher, Marcel & Straub, Roland & Lo Duca, Marco, 2013. "On the international spillovers of US quantitative easing," Working Paper Series 1557, European Central Bank.
    5. Contessi, Silvio & De Pace, Pierangelo & Guidolin, Massimo, 2014. "How did the financial crisis alter the correlations of U.S. yield spreads?," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 362-385.
    6. Clara Machado & Carlos León & Miguel Sarmiento & Freddy Cepeda, 2011. "Riesgo Sistémico Y Estabilidad Del Sistema De Pagos De Alto Valor En Colombia: Análisis Bajo Topología De Redes Y Simulación De Pagos," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 29(65), pages 106-175, June.
    7. Beaupain, Renaud & Durré, Alain, 2013. "Central bank reserves and interbank market liquidity in the euro area," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 259-284.
    8. James Felkerson, 2012. "Fiddling in Euroland as the Global Meltdown Nears," Economics Public Policy Brief Archive ppb_123, Levy Economics Institute.
    9. Yang, Hsin-Feng & Liu, Chih-Liang & Chou, Ray Yeutien, 2014. "Interest rate risk propagation: Evidence from the credit crunch," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 242-264.
    10. James Felkerson, 2011. "$29,000,000,000,000: A Detailed Look at the Fed's Bailout by Funding Facility and Recipient," Economics Working Paper Archive wp_698, Levy Economics Institute.
    11. Dalia S Hakura & Ralph Chami & Thomas F. Cosimano & Adolfo Barajas, 2010. "U.S. Bank Behavior in the Wake of the 2007–2009 Financial Crisis," IMF Working Papers 10/131, International Monetary Fund.
    12. Ji, Philip Inyeob, 2012. "Time-varying financial stress linkages: Evidence from the LIBOR-OIS spreads," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 647-657.
    13. Yi Wang, 2010. "Convertibility Restriction Determination in China's Foreign Exchange Market and its Impact of Forward Pricing," Discussion Papers 09-024, Stanford Institute for Economic Policy Research.
    14. Andre Guettler & Ulrich Hommel & Julia Reichert, 2011. "The influence of sponsor, servicer, and underwriter characteristics on RMBS performance," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 25(3), pages 281-311, September.
    15. Cui, Jin & In, Francis & Maharaj, Elizabeth Ann, 2016. "What drives the Libor–OIS spread? Evidence from five major currency Libor–OIS spreads," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 358-375.

    More about this item

    Keywords

    Credit ; Liquidity (Economics) ; Risk ; Federal Reserve Bank of New York ; Bank supervision;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:389. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber). General contact details of provider: http://edirc.repec.org/data/frbnyus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.