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Staff Working Paper: Recognizing the Value of the Central Bank as a Liquidity Backstop

By Bill Nelson

(revised June 2018) 

This paper argues that a critical missing element of the internationally agreed bank liquidity condition metric, the liquidity coverage ratio (LCR), is recognition of the liquidity support available to a commercial bank from the central bank.  The paper describes a way that central banks can adjust their lending and deposit taking operations so that banks get, for a fee, recognition of their borrowing capacity.  Likely inadvertently, such arrangements effectively already exist at the ECB, BoE, and BoJ.  If the Federal Reserve were to adopt the proposed facilities, it would enhance economic growth, make the financial system safer, and raise money for taxpayers.