Central Bank Emergency Support to Securities Markets
IMF Working Papers, July 10, 2017
Source details
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- Central Bank Emergency Support to Securities Markets
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Bibliographic details
- Authors: Darryl King, Kelly Eckhold, Peter Lindner, Diarmuid Murphy
- Published: July 10, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484305850.001
Overview and central findings
- The paper "Central Bank Emergency Support to Securities Markets" examines the central bank mandate with respect to financial stability and identifies the links to the functioning of securities markets.
- Core argument: emergency support to securities markets is an important part of the crisis management response, but a high bar should be set for its use.
- Conditional use: emergency support should be used only as part of a comprehensive policy package.
- The paper considers:
- what types of securities markets may be important for financial stability;
- what market conditions could trigger emergency support measures;
- how programs can be designed to restore market functioning while minimizing moral hazard.
Types of markets and market conditions (themes examined)
- Markets considered important for financial stability: securities markets broadly (including references to ABCP market, ABS market, Treasury bill market, commercial paper, money market mutual funds).
- Market conditions that could trigger emergency support measures:
- severe market dysfunction that impairs price discovery and market making;
- conditions that could lead to fire sales or widespread disruption of financing markets;
- threats to market liquidity and market functioning that spill over to financial institutions and the broader financial system.
Program design and moral hazard mitigation
- Design objective: restore market functioning while minimizing moral hazard.
- Program design considerations highlighted:
- set a high bar for intervention (stringent conditions for use);
- embed central bank support within a comprehensive policy package (complementary fiscal, regulatory, and supervisory measures implied);
- preserve incentives for private sector risk management and continuity of market discipline.
- Roles discussed: lender-of-last-resort functions, market maker of last resort, and targeted liquidity facilities (references include money market mutual fund liquidity facility and commercial paper money market mutual fund liquidity facility).
Policy implications and recommendations
- Emergency securities-market support should be:
- limited and targeted to instances where market dysfunction threatens financial stability;
- temporary and structured to restore private market functioning;
- accompanied by measures to limit moral hazard and protect central bank balance sheets and public finances.
- Use in crisis management only when part of a comprehensive policy package, not as a stand-alone tool.
Keywords and subject focus
- Subjects: Asset and liability management; Asset liquidity; Banking; Financial institutions; Financial markets; Financial sector policy and analysis; Financial sector stability; Liquidity; Securities; Securities markets.
- Keywords included in the paper: ABCP market; ABS market; Asset liquidity; central bank; commercial paper money market mutual fund liquidity facility; financial market; Financial sector stability; financial stability; financing market; fire sales; Global; Lender-of-last resort; liquidity; market condition; market functioning; market liquidity; market maker of last resort; market making; monetary policy; money market mutual fund liquidity facility; mutual fund; price discovery; Securities; securities dealer; Securities markets; Treasury bill market; WP.
Content in this bundle
- Central Bank Emergency Support to Securities Markets, WP/17/152, July 2017