Central Bank Liquidity Tools

February 19-20, 2009

On February 19-20, 2009, the Federal Reserve Bank of New York will host a conference that brings together academics, market participants, and policymakers to discuss the tools central banks use to provide liquidity to financial institutions and markets.

Overview
In response to the recent market turmoil, central banks have designed a variety of new tools for supplying liquidity to financial institutions. The Federal Reserve, for example, has introduced several programs--the Term Auction Facility, the Term Securities Lending Facility, and the Primary Dealer Credit Facility--since December 2007, while enhancing traditional tools such as the discount window and open market operations. In addition, the European Central Bank and the Swiss National Bank have conducted liquidity-providing operations in U.S. dollars and established foreign exchange swap lines with the Fed. Central banks have also increased the range of collateral they accept in open market operations and lengthened the maturity terms of their liquidity provision.

These changes raise many questions. What are the effects of different methods of liquidity provision on financial markets, on market participants, and on the broader economy? Do the new policy tools constitute a fundamental change to the ways that central banks have traditionally provided liquidity to markets? Would central banks be well-served to include these facilities among their regular set of policy tools? Audience
The conference is open to academics and other researchers in the fields of economics and finance. It is closed to the media.

Conference Location
Federal Reserve Bank of New York
33 Liberty Street
12th Floor Conference Center
New York, NY 10045

Conference Organizers
Seth Carpenter
Spence Hilton
Todd Keister
Patricia Mosser
Asani Sarkar

Agenda
Thursday, February 19
8:15 a.m. Continental Breakfast
8:45 a.m. Opening Remarks

Patricia Mosser, Senior Vice President and Acting SOMA Manager
9:00 a.m. Session I: Overview of Recent Problems in Liquidity Provision
Chair:Tobias Adrian, FRBNY

Central Bank Tools and Liquidity Shortages pdf
Stephen G. Cecchetti, Bank for International Settlements

Bengt Holmstrom, Massachusetts Institute of Technology
10:15 a.m. Coffee Break
10:30 a.m. Session II: Funding Liquidity and Market Liquidity
Chair: Til Schuermann, FRBNY

Leverage, Moral Hazard, and Liquidity pdf
Viral Acharya, New York University's Stern School of Business, and London Business School
S. (“Vish”) Viswanathan, Duke University
Presentation >> pdf

Discussant: Patrick Bolton, Columbia University

Interbank Market Liquidity and Central Bank Intervention pdf
Franklin Allen, University of Pennsylvania
Elena Carletti, European University Institute
Douglas Gale, New York University
Presentation >> pdf

Discussant: Adriano A. Rampini, Duke University
Discussion >> pdf

Bank Liquidity, Interbank Markets, and Monetary Policy pdf
Xavier Freixas, Universitat Pompeu Fabra
Antoine Martin
, Federal Reserve Bank of New York
David Skeie, Federal Reserve Bank of New York
Presentation >> pdf

Discussant: Franklin Allen, University of Pennsylvania
Discussion >> pdf
12:30 p.m. Lunch
2:00 p.m.

Session III: Policy Responses to Illiquidity
Chair: James J. McAndrews, FRBNY

Illiquidity and Interest Rate Policy pdf
Douglas W. Diamond
Raghuram G. Rajan, University of Chicago and NBER
Presentation >> pdf

Discussant: Guido Lorenzoni, MIT
Discussion >>pdf

Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk pdf
Florian Heider, European Central Bank
Marie Hoerova, European Central Bank
Cornelia Holthausen, European Central Bank
Presentation >> pdf

Discussant: Gaetano Antinolfi, Washington University
Discussion >> pdf

3:20 p.m. Coffee Break
3:40 p.m.

Session IV: Collateral and Haircuts
Chair: Simon M. Potter, FRBNY

Rollover Risk and Market Freezes pdf
Viral Acharya, New York University's Stern School of Business, and London Business School
Douglas Gale, New York University
Tanju Yorulmazer, Federal Reserve Bank of New York
Presentation >> pdf

Discussant: Michael Manove, Boston University
Discussion >> pdf

Central Bank Haircut Policy pdf
James Chapman, Bank of Canada
Jonathan Chiu, Bank of Canada
Miguel Molico, Bank of Canada
Presentation >> pdf

Discussant: Mitchell Berlin, Federal Reserve Bank of Philadelphia
Discussion >> pdf

5:00 p.m. Reception
6:00 p.m. Dinner (by Invitation Only)

Keynote Speaker: John Geanakoplos, Yale University

Liquidity, Default, and Crashes pdf

Solving the Present Crisis and Managing the Leverage Cycle word
Friday, February 20
8:30 a.m. Continental Breakfast
9:00 a.m. Session V: Empirical Evaluation of Central Bank Liquidity Programs -I
Chair: Seth B. Carpenter, Board of Governors, FRB

Do Central Bank Liquidity Facilities Affect Interbank Lending Rates? pdf
Jens H. E. Christensen, Federal Reserve Bank of San Francisco
Jose A. Lopez, Federal Reserve Bank of San Francisco
Glenn D. Rudebusch, Federal Reserve Bank of San Francisco
Presentation >> pdf

Discussant: Pierre Collin-Dufresne, Columbia University
Discussion >> pdf

Repo Market Effects of the Term Securities Lending Facility pdf

Michael Fleming, Federal Reserve Bank of New York
Warren Hrung, Federal Reserve Bank of New York
Frank Keane, Federal Reserve Bank of New York
Presentation >> pdf

Discussant: Lasse H. Pedersen, New York University's Stern School of Business
Discussion >> pdf
10:20 a.m. Coffee Break
10:40 a.m. Session VI: Empirical Evaluation of Central Bank Liquidity Programs -II
Chair: James Vickery, FRBNY

Funding Liquidity Risk: Definition and Measurement pdf
Mathias Drehmann, Bank for International Settlements
Kleopatra Nikolaou, European Central Bank
Presentation >> pdf

Discussant: Marie Hoerova, European Central Bank
Discussion >> pdf

Provision of Liquidity through the Primary Credit Facility during the Financial Crisis: A Structural Analysis pdf
Erhan Artuc, Koc University
Selva Demiralp, Koc University
Presentation >> pdf

Discussant: Carolyn Wilkins, Bank of Canada
Discussion >> pdf
12:00 p.m. Lunch
1:15 p.m. Panel Discussion
Chair: Patricia Mosser, FRBNY

Louis Crandall, Wrightson ICAP
Presentation >> pdf
Andrew W. Lo, Massachusetts Institute of Technology
Paul Mercier, ECB
Lasse H. Pedersen, New York University's Stern School of Business
Presentation >> pdf
W. Alexander Roever, J.P. Morgan Chase
2:30 p.m. Adjourn
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