Abstract
The evaporation of liquidity has been at the center of the financial crisis that erupted in August 2007 and intensified following the collapse of a number of financial institutions in October 2008. Banks and other financial institutions with funding needs faced increasingly serious problems in drawing funds from the interbank money market, triggering central banks to intervene as lenders of last resort. At the same time, market liquidity dried up in a number of markets such as the one for asset-backed securities, making it more difficult for financial institutions to off-load the more complex assets on their balance sheet. Again, in a number of cases central banks stepped in to become market makers of last resort. The drying up of both funding and market liquidity and their interaction played an important role in the propagation of the crisis.
Authors
- Douglas Gale
- Rafael Repullo
- Til Schuermann
- Frank Smets