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DNBulletin: Time to revisit crisis liquidity support
- dnbulletin -
17 juli 2018
- The liquidity support the Eurosystem provided to banks during the financial crisis was necessary, but also had unintended consequences. This support ended up with a small proportion of the banks. They also continued to make use of it for a long time, even when the market situation became more normal. Liquidity support has thus been associated with weakened market discipline and failure to make the necessary balance sheet adjustments. Adjusting the existing monetary policy framework could prevent this from happening again in the future. The creation of a separate facility with specific conditions for providing extended liquidity support is also worth considering. These recommendations stem from an evaluation of the support operations conducted in recent years. The recent DNB Occasional Study [Revisiting the central bank’s lender of last resort function] provides further details.
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