Addressing Market Dysfunction and Liquidity Stresses in Nonbank Financial Intermediaries

Central banks support markets or institutions because doing so will help them meet their mandate with regard to the maintenance of price and financial stability. During crises, central banks expand the breadth of their operations, lengthen the duration of lending, and expand the range of counterparties they deal with and the pool of eligible collateral. The central bank provision of liquidity to banks has long been the staple tool for addressing financial stability risks when stresses arise. However, central banks provided liquidity support for many types of nonbank financial intermediaries (NBFIs) during both the global financial crisis and the COVID-19 pandemic. The objective of this note is to examine the central bank policy toolbox. It discusses some desirable design features of central bank liquidity that may support NBFIs based on recent observations and some long-standing principles. Because robust regulation and supervision are the first line of defense to address and mitigate the systemic liquidity risks and to contain excessive risk-taking behavior, the note also briefly discusses key regulatory and supervisory priorities for NBFIs.