"In particular, policymakers should aim to strike a balance between reducing reliance on the LOLR on the one hand and moderating the costs created by liquidity shortages on the other hand"
- Dr.Jeremy Stein, the Fed Board member
Dr. Jeremy Stein, the Fed Board member, raised an issue of liquidity regulation at the Richmond Fed's 2013 Credit Markets Symposium. He claimed that liquidity regulation plays a key role in the financial stability, with key elements including Liquidity Coverage Ratio and Net Stable Funding Ratio.
"However, we should avoid thinking about it in isolation; rather, we can best understand it as part of a larger toolkit that also includes capital regulation and, importantly, the central bank's LOLR function. Therefore, proper design and implementation of liquidity regulations such as the LCR should take account of these interdependencies," Dr. Stein said. "In particular, policymakers should aim to strike a balance between reducing reliance on the LOLR on the one hand and moderating the costs created by liquidity shortages on the other hand--especially those shortages that crop up in times of severe market strain. "
The Fed is implementing a new toolkit setting liquidity, capital and risk management standards under the 2010 Dodd-Frank Act. The central bankers intend to avert a recurrence of the financial crisis, in which many firms faced with severe liquidity shortage, contributing to collapse of many companies.
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