Remarks — "Central Bank Liquidity Assistance: Challenges of Franchise and Asset Values in Banking Crises"
Recent comments at the Atlanta Fed's "Central Banking in the Post-Pandemic Financial System" conference
The Atlanta Fed has published my remarks from its Financial Markets Conference panel, “Domestic Liquidity Provision during Potential Crises.”
The full panel—with BPI’s Bill Nelson, Yale’s Susan McLaughlin, and the ECB’s Luc Laeven—can be viewed here.
I sought to cover a few big-picture issues, which have gotten less focus as we’ve zeroed in on a handful of increasingly consensus technical reforms to the discount window:
What should we actually expect from the discount window? Can it be expected to save a bank?
The elephant in the room: how to distribute sufficient emergency liquidity when collateral market value has fallen as a result of monetary policy. The BTFP has been characterized as a policy failure of the discount window. But, would a perfect-world discount window really have been able to accomplish what the discount window did? There are parallels to “dash-for-cash” episodes, where market values fall irrespective of monetary policy or credit risk.
Collateral values are partly endogenous to the central bank’s financial stability function—certainly for credit risk, but also particularly for banks who derive franchise value from funding themselves more cheaply than implied by mark-to-market pricing. This has implications for crisis facility design.
The speech is also heavily footnoted to hopefully function as a one-stop-shop document and provide further reading to those interested. Link again to the remarks here: https://www.atlantafed.org/-/media/documents/news/conferences/2024/05/19/financial-markets-conference/presentations/kelly-remarks.pdf
Comments also welcome via email (steven.kelly@yale.edu) and Twitter (@StevenKelly49).