Tuesday, August 30, 2011

Central bank liquidity support increases financial instability

While central bank liquidity support is used on a large scale to combat the instability of the banking sector, this column argues that the prospect of receiving such support might well have been one of the causes of the instability. In particular, it shows that the provision of liquidity support stimulates banks to engage in various forms of risk-taking, and to do so in a procyclical way.

Economist, Strategy Department of the Division of Supervisory policy, Dutch Central Bank at VOX EU.

1 comment:

El Viejo said...

What about the liquidity from 401Ks and rich man's hedge funds?