Central banks across the globe must take advantage of calm times to prepare for the effective provision of liquidity assistance to banks once it is needed in times of stress, particularly by coordinating with one another and with other financial regulators, the Bank for International Settlements' Committee on the Global Financial System said April 6.
"Central banks need to consider how their national frameworks for [liquidity assistance] might interact when providing [assistance] in a cross-border context. They also need to cooperate with a wide range of other policy-making institutions, including regulators, supervisors and resolution authorities," said William Dudley, president and CEO of the Federal Reserve Bank of New York and committee chair.
The committee identified eight principles that address specific challenges related to liquidity assistance, six of which relate to the need for central banks to work closely with each other when providing liquidity assistance to an internationally active financial intermediary.
Specifically, it said central banks will need to pay more attention to the allocation of responsibilities when providing liquidity assistance, information sharing, the eligibility of financial intermediaries to receive aid, solvency issues, collateral and the provision of foreign currency.
Central banks should also work to improve transparency when dealing with liquidity assistance, while recognising that premature disclosure of specific cases could give rise to financial stability concerns. They should also seek to better understand the implications of the evolution of market-based forms of financial intermediation, according to the committee.