BWC Financial Stability Team Releases New Brief on Global Liquidity

FOR IMMEDIATE RELEASE (Washington, DC - September 13, 2024)The Bretton Woods Committee is today releasing the publication "Fragile Global Liquidity: Sources and Policy Implications" which explores the sources and consequences of vulnerabilities affecting global liquidity and recommends actionable steps for central banks to improve its resilience.

The global financial system has faced an unprecedented series of shocks that have exposed the fragility of liquidity. The COVID-19 pandemic triggered severe market dysfunction. And recent geopolitical disturbances and inflationary pressures, followed by the rapid tightening of monetary policies by central banks worldwide, have exposed vulnerabilities in global liquidity, in sovereign debt markets, banks, and non-bank financial firms (NBFIs).

Global liquidity risks and the demand for liquidity and sovereign debt has outstripped the intermediation capacity of providers. Activity has migrated to NBFIs, often reliant upon wholesale, short-term funding and lacking access to official sources of liquidity. The shift to collateralized finance and central clearing has also transformed counterparty risk into liquidity risk. The US dollar's rise as a global safe asset has also amplified demand for dollar-denominated liquidity.

"Liquidity is the lifeblood of the international financial system, and recent global developments have underscored just how fragile it can be," said Richard Berner and Michael Granito, authors of the report. "Our report identifies some critical areas where policy changes can mitigate that fragility. By improving market and firm resilience, by enhancing central bank liquidity tools and by coordinating policy measures across borders, we can build a more resilient global financial system."

In addition to suggesting actions to improving market and firm resilience as the first line of defense, the report recommends four other specific actions: Maximize the effectiveness of discount window operations for banks; e.g., in the US by prepositioning collateral with the Fed; improving the deposit insurance regimes; expanding appropriate access to regulated NBFIs for liquidity in stress conditions, and improving the provision of dollar-denominated liquidity.

Bretton Woods Committee Chair and co-leader of the Financial Stability Project Team, William C. Dudley, echoed these sentiments: "As the global financial landscape becomes more interconnected, the need for comprehensive risk management strategies is paramount. The recommendations outlined in this report, such as pre-positioning collateral and expanding access to liquidity for regulated NBFIs, are essential steps toward ensuring financial stability in an increasingly volatile world."

Dudley discussed the report's findings and recommendations at the Bretton Woods Committee's Future of Finance Forum in Singapore held in partnership with UBS.

About the Bretton Woods Committee:

The Bretton Woods Committee (BWC) is the preeminent non-profit organization dedicated to effective global economic and financial cooperation. BWC demonstrates the value of multilateralism and enhances the performance of international financial institutions (IFIs) through public dialogue, advocacy, and policy analysis.