출처: Kleopatra Nikolaou (2009). LIQUIDITY (RISK) CONCEPTS: DEFINITIONS AND INTERACTIONS. European Central Bank, Working Paper Series, No. I008, February 2009.
※ 차례:
Abstract (4)
Non-technical Summary (5)
1. Introduction (7)
2. Definitions (10) | 2.1 Liquidity (10) | 2.2 Liquidity Risk (15)
3. Liquidity linkages (20) | 3.1 Liquidity linkages in normal times (20) | 3.2 Liquidity linkages in turbulent times (23)
4. A Description of the current turmoil (38)
5. Policy Recommendations and conclusions (42)
...
Abstract:
- ( ... ) We distinguish between three different liquidity types, central bank liquidity, funding and market liquidity and their relevant risks. In order to understand the workings of financial system liquidity, as well as the role of the central bank, we bring together relevant literature from different areas and review liquidity linkages among these three types in normal times and turbulent times.
- We stress that the root of liquidity risk lies in information asymmetries and the existence of incomplete markets.
- The role of central bank liquidity can be important in managing a liquidity crisis, yet it is not a panacea. It can act as an immediate but temporary buffer to liquidity shocks, thereby allowing time for supervision and regulation to confront the causes of liquidity risk.
Non-technical summary:
Financial liquidity is an elusive notion, yet of paramount importance for the well-functioning of the financial system. In fact, the events in financial markets since August 2007 bear all the hallmarks of increased funding liquidity risk, but also reveal how this type of risk can contaminate market liquidity and necessitate reactions from central banks. This project combines literature on liquidity from various fields of research in a schematic and holistic way in order to provide a unified and consistent account of financial system liquidity and liquidity risk. The outcome of this effort reveals the following.
Three main liquidity notions, namely central bank liquidity, market liquidity and funding liquidity are defined and discussed. Their complex and dynamic linkages can give us a good understanding of the liquidity workings in the financial system and reveal positive or negative effects for financial stability, depending on the levels of liquidity risk prevailing.
The cause of liquidity risk lie on departures from the complete markets and symmetric information paradigm, which can lead to moral hazard and adverse selection. To the extent that such conditions persist, liquidity risk is endemic in the financial system and can cause a vicious link between funding and market liquidity, prompting systemic liquidity risk. It is exactly this type of market risk that typically alerts policy makers, because of its potential to destablise the financial system. In such cases emergency liquidity provisions can be a tool to restore balance.
The central bank has the ability and the obligation to minimise the real costs of liquidations and the probability of a financial system meltdown. However, the role of central bank liquidity in such turbulent periods does not have guaranteed success, as it cannot tackle the roots of liquidity risk. In fact, the potential benefits are limited by the fact that the central bank cannot distinguish between illiquid and insolvent banks with certainty. Therefore, it should only focus on halting (temporarily) the vicious circle between funding and market liquidity. The tradeoff between the benefits and costs of intervention should be taken into account when the central banks has to decide on its liquidity providing strategy. This task is not easy and there is no established rule of thumb.
In order to eliminate systemic liquidity risk, greater transparency of liquidity management practices in[is] needed. Supervision and regulation are the fundamental weapons against systemic liquidity risk. These practices can tackle the root of liquidity risk by minimising asymmetric information and moral hazard through effective monitoring mechanisms of the financial system. In this way it is easier to distinguish between solvent and illiquid agents and therefore impose liquidity cushions to the ones most in need. This would also help markets become more complete. However, such mechanisms can be costly, due to the amount of information that needs to be gathered. They should, therefore, be run by the most cost efficient and result-effective agent.
1. Introduction
[Figure 1] Liquidity in the euro area money market (source: ECB)
This project differs from the current literature on liquidity. The academic literature up-to-date has looked at various liquidity types and has recorded broad linkages between them. However, it mainly treated the different concepts of liquidity in a rather fragmented way, because it aimed at explaining issues not necessarily related to financial liquidity and liquidity linkages.[n.1] In other words, it mainly used various notions of liquidity and fragmented parts of their linkages as input for the analysis of various other issues. As a result, it has yet to provide an analysis of the various liquidity types into a context focused only on liquidity. This project addresses this gap. It provides a structured and coherent approach of financial liquidity (risk) by concentrating, condensing and re-interpreting a broad spectrum of available literature results.
( ... ... )
( ... ... )
2. Definitions
( ... ) The three main types [of liquidity] are central bank liquidity, market liquidity and funding liquidity. We analyse the properties and empirical behaviour of each liquidity (risk) type. We also present measures of liquidity risk an discuss the relation between liquidity and liquidity risk.
2.1 Liquidity
The notion of liquidity in the economic literature relates to the ability of an economic agent to exchange his or her wealth for goods and services or for other assets.[n.2] In this definition, two issues should be noted.
2.1.1 Central bank liquidity
Central bank liquidity is the ability of the central bank to supply the liquidity needed to the financial system. It is typically measured as the liquidity supplied to the economy by the central bank, i.e. the flow of monetary base[n.3] from the central bank to the financial system. It relates to "central bank operations liquidity", which refers to the amount of liquidity provided through the central bank auctions to the money market according to the "monetary policy stance". The latter reflects the prevailing value of the operational target, i.e. the control variable of the central bank. In practice, the central bank strategy determines the monetary policy stance, that is, decides on the level of the operational target (usually the key policy rate). In order to implement this target, the central bank uses its monetary policy instruments (conduct open market operations) to affect the liquidity in the money markets so that the interbank rate is closely aligned to the operational target rate set by the prevailing monetary policy stance.
[n.3] The monetary base, otherwise known as base money or M-zero (M0) relates to the supply of money in the economy and comprise the currency (banknotes) in circulation and banks' reserves with the central bank.
More technically, central bank liquidity, a synonym for the supply of base money, results from managing the central bank assets in its balance sheet, in accordance to the monetary policy stance.[n.4] Consider the balance sheet of a central bank (see Figure 2) [n.5] In the liabilities side, the main components are the autonomous factors and the reserves. The autonomous factors contain transactions which are not controlled by the monetary policy function of the central bank.[n.6] The reserves refer to balances owned by credit institutions and held with the central bank in order to meet settlement obligations from interbank transactions and fulfil reserve requirements, i.e. the minimum balances that banks are required to hold with the central bank.[n.7] The need for banknotes and the obligations of banks to fulfil the reserve requirements create an aggregate liquidity deficit in the system, thereby making it reliant on refinancing from the central bank. The central bank, being the monopoly provider of the monetary base, provides liquidity to the financial system through its open market operations. Thus, these operations appear in the asset side of the central bank's balance sheet. The liquidity provided by the central bank through its operations, i.e. its assets, should balance the liquidity deficit of the system, i.e. its liabilities. Therefore, the central bank provides liquidity equal to the sum of the autonomous factors[n.8] plus the reserves. The central bank manages its market operations so that the inter-bank short-term lending rates remain closely aligned to the target policy rates.[n.9]
[Figure 2] The balance sheet of the central bank
Assets ┬ Liabilities
Open Market Operations │ Net Autonomous factors
(Net liquidity provision to the system) │ (banknotes + government deposits - net foreign assets + other net factors)
│ Reserves (required reserves + excess reserves)
The Basel Committee of Banking Supervision defines funding liquidity as the ability of banks to meet their liabilities, unwind or settle their positions as they come due (BIS, 2008)[n.11] Similarly, the IMF provides a definition of funding liquidity as the ability of solvent institutions to make agreed upon payments in a timely fashion. However, references to funding liquidity have also been made from the point of view of traders (Brunnermeier and Pederson, 2007) or investors (Strahan, 2008), where funding liquidity relates to their ability of raise funding (capital or cash) in short notice. All definitions are compatible (see a relevant discussion in Drehmann and Nikolaou, 2008). This can be clearly seen in practice, where funding liquidity, being a flow concept, can be understood in terms of a budget constraint. Namely, an entity is liquid as long as inflows are bigger or at least equal to outflows. This can hold for firms, banks, investors and traders. This paper mainly focuses on the funding liquidity of banks, given their importance in distributing liquidity in the financial system.
The notion of market liquidity has been around at least since Keynes (1930). It took a long time, however, until a consensus definition became available. A number of recent studies define market liquidity as the ability to trade an asset at short notice, at low cost and with little impact on its price. It therefore becomes obvious that market liquidity should be judged on several grounds. The most obvious would be the ability to trade. Moreover, Fernandez (1999) points out that “(market) liquidity, as Keynes noted [...] incorporates key elements of volume, time and transaction costs. Liquidity then may be defined by three dimensions which incorporate these elements: depth, breadth (or tightness) and resiliency.” [n.14] These dimensions ensure that any amount of assets can be sold anytime within market hours, rapidly, with minimum loss of value and at competitive prices.
Three main liquidity notions, namely central bank liquidity, market liquidity and funding liquidity are defined and discussed. Their complex and dynamic linkages can give us a good understanding of the liquidity workings in the financial system and reveal positive or negative effects for financial stability, depending on the levels of liquidity risk prevailing.
The cause of liquidity risk lie on departures from the complete markets and symmetric information paradigm, which can lead to moral hazard and adverse selection. To the extent that such conditions persist, liquidity risk is endemic in the financial system and can cause a vicious link between funding and market liquidity, prompting systemic liquidity risk. It is exactly this type of market risk that typically alerts policy makers, because of its potential to destablise the financial system. In such cases emergency liquidity provisions can be a tool to restore balance.
The central bank has the ability and the obligation to minimise the real costs of liquidations and the probability of a financial system meltdown. However, the role of central bank liquidity in such turbulent periods does not have guaranteed success, as it cannot tackle the roots of liquidity risk. In fact, the potential benefits are limited by the fact that the central bank cannot distinguish between illiquid and insolvent banks with certainty. Therefore, it should only focus on halting (temporarily) the vicious circle between funding and market liquidity. The tradeoff between the benefits and costs of intervention should be taken into account when the central banks has to decide on its liquidity providing strategy. This task is not easy and there is no established rule of thumb.
In order to eliminate systemic liquidity risk, greater transparency of liquidity management practices in[is] needed. Supervision and regulation are the fundamental weapons against systemic liquidity risk. These practices can tackle the root of liquidity risk by minimising asymmetric information and moral hazard through effective monitoring mechanisms of the financial system. In this way it is easier to distinguish between solvent and illiquid agents and therefore impose liquidity cushions to the ones most in need. This would also help markets become more complete. However, such mechanisms can be costly, due to the amount of information that needs to be gathered. They should, therefore, be run by the most cost efficient and result-effective agent.
1. Introduction
“The word liquidity has so many facets that [it] is often counter-productive to use it without further and closer definition.” Charles Goodhart (BdF, 2008)Financial market is an elusive notion, yet of paramount importance for the well-functioning of the financial system. Indeed a quick view into the financial market tensions since August 2007 stress[es] this point. These tensions appeared as liquidity in money markets declined significantly (see Figure 1), following credit rationing in the interbank markets. This was due to the fact that banks refused to lend to each other because of funding problems relating to uncertainty over their exposure to structured products. The amount of exposure was a significant consideration because market liquidity of these structured assets had declined significantly, thereby reinforcing difficulties in valuing such products. As a result, central banks intervened and injected liquidity into the markets. This short exposition reveals important insights. To begin with, financial markets liquidity can take may different facetsㅡsuch as market liquidity (interbank and asset market), funding liquidity and central bank liquidity. More importantly, in order to understand financial system liquidity, one needs to look closer at the various forms of liquidity in the financial system and the linkages between them.
[Figure 1] Liquidity in the euro area money market (source: ECB)
This project differs from the current literature on liquidity. The academic literature up-to-date has looked at various liquidity types and has recorded broad linkages between them. However, it mainly treated the different concepts of liquidity in a rather fragmented way, because it aimed at explaining issues not necessarily related to financial liquidity and liquidity linkages.[n.1] In other words, it mainly used various notions of liquidity and fragmented parts of their linkages as input for the analysis of various other issues. As a result, it has yet to provide an analysis of the various liquidity types into a context focused only on liquidity. This project addresses this gap. It provides a structured and coherent approach of financial liquidity (risk) by concentrating, condensing and re-interpreting a broad spectrum of available literature results.
[n.1] For example central bank liquidity is typically discussed in the context of monetary policy implementation, but also enters into the lender of last resort literature. Market liquidity is typically seen separately in the asset pricing literature, and funding liquidity is usually discussed in the context of liquidity management. More recently, links between funding and market liquidity have been recorded in the theoretical and empirical literature (Brunnermeier and Pderson, 2007; Drehmann and Nikolaou, 2008).More specifically this project presents a coherent liquidity framework where it differentiates between the various liquidity types, appropriately defines them and brings forward the linkages among them (i.e. describe the transmission channels and spill-over directions among these types). Namely, it describes liquidity flows in the financial system by examining the linkages between three broad liquidity types: central bank liquidity, market liquidity and funding liquidity.
- The first relates to the liquidity provided by the central bank,
- the second to the ability of trading in the markets,
- and the third to the ability of banks to fund their positions.
( ... ... )
( ... ... )
2. Definitions
( ... ) The three main types [of liquidity] are central bank liquidity, market liquidity and funding liquidity. We analyse the properties and empirical behaviour of each liquidity (risk) type. We also present measures of liquidity risk an discuss the relation between liquidity and liquidity risk.
2.1 Liquidity
The notion of liquidity in the economic literature relates to the ability of an economic agent to exchange his or her wealth for goods and services or for other assets.[n.2] In this definition, two issues should be noted.
- First, liquidity can be understood in terms of flows (as opposed to stocks), in other words, it is a flow concept. In our framework, liquidity will refer to the unhindered flows among the agents of the financial system, with a particular focus on the flows among the central banks, commercial banks and markets.
- Second, liquidity refers to the “ability” of realising these flows. Inability of doing so would render the financial entity illiquid. As will become obvious below, this ability can be hindered because of asymmetries in information and the existence of incomplete markets.
[n.2] This remark draws heavily from Wiliamson's (2008) discussion of liquidity constraints. According to his discussion, such constraints “affect the ability of an economic agent to exchange his or her existing wealth for goods and services or for other assets”.
2.1.1 Central bank liquidity
Central bank liquidity is the ability of the central bank to supply the liquidity needed to the financial system. It is typically measured as the liquidity supplied to the economy by the central bank, i.e. the flow of monetary base[n.3] from the central bank to the financial system. It relates to "central bank operations liquidity", which refers to the amount of liquidity provided through the central bank auctions to the money market according to the "monetary policy stance". The latter reflects the prevailing value of the operational target, i.e. the control variable of the central bank. In practice, the central bank strategy determines the monetary policy stance, that is, decides on the level of the operational target (usually the key policy rate). In order to implement this target, the central bank uses its monetary policy instruments (conduct open market operations) to affect the liquidity in the money markets so that the interbank rate is closely aligned to the operational target rate set by the prevailing monetary policy stance.
[n.3] The monetary base, otherwise known as base money or M-zero (M0) relates to the supply of money in the economy and comprise the currency (banknotes) in circulation and banks' reserves with the central bank.
More technically, central bank liquidity, a synonym for the supply of base money, results from managing the central bank assets in its balance sheet, in accordance to the monetary policy stance.[n.4] Consider the balance sheet of a central bank (see Figure 2) [n.5] In the liabilities side, the main components are the autonomous factors and the reserves. The autonomous factors contain transactions which are not controlled by the monetary policy function of the central bank.[n.6] The reserves refer to balances owned by credit institutions and held with the central bank in order to meet settlement obligations from interbank transactions and fulfil reserve requirements, i.e. the minimum balances that banks are required to hold with the central bank.[n.7] The need for banknotes and the obligations of banks to fulfil the reserve requirements create an aggregate liquidity deficit in the system, thereby making it reliant on refinancing from the central bank. The central bank, being the monopoly provider of the monetary base, provides liquidity to the financial system through its open market operations. Thus, these operations appear in the asset side of the central bank's balance sheet. The liquidity provided by the central bank through its operations, i.e. its assets, should balance the liquidity deficit of the system, i.e. its liabilities. Therefore, the central bank provides liquidity equal to the sum of the autonomous factors[n.8] plus the reserves. The central bank manages its market operations so that the inter-bank short-term lending rates remain closely aligned to the target policy rates.[n.9]
[Figure 2] The balance sheet of the central bank
Assets ┬ Liabilities
Open Market Operations │ Net Autonomous factors
(Net liquidity provision to the system) │ (banknotes + government deposits - net foreign assets + other net factors)
│ Reserves (required reserves + excess reserves)
[n.4] See ECB (2004) and Bindseil (2005).
[n.5] The view of the balance sheet presented here is very simple. For a detailed analysis see Bindseil (2004).
[n.6] In the euro system balance sheet the autonomous factor category contains banknotes in circulation, government deposits, net foreign assets and "other net factors" (see ECB, 2004).
[n.7] Usually, the amount of reserve requirements is close to the amount of total reserves. A potential reason might beㅡamong othersㅡthat excess reserve requirements are not remunerated.
[n.8] In practice the actual size of autonomous factors are not known and a forecast of them is used to determine the liquidity allotment. See ECB (2004) for details on this issue and for the properties of the autonomous factor forecasts.
[n.9] The short-term rates refer typically to the overnight rates, although in cases of some central banks, it can also be weekly or even three month money market rates.At this point, a note should be made regarding the relationship of central bank liquidity and monetary or macroeconomic liquidity. The latter refers to the growth of money, credit and aggregate savings.[n.10] Therefore, it includes broad monetary aggregates and in that sense includes central bank liquidity. Monetary liquidity is important for monetary policy decision making[.] [H]owever, we focus on central bank liquidity, because it is directly influenced by the central bank. It, thus, brings out the role of the central bank in financial liquidity in a clearer manner, which, from a policy making point of view, is more relevant.
[n.10] See Ferguson et al (2007) in Geneva Report on the World Economy for a definition of macroeconomic liquidity. The report presents a similar distinction of liquid[ity] types, namely macroeconomic liquidity, funding liquidity and market liquidity (pp. 9 and 10). Moreover, it mentions that these notions are inter-related and are important for financial stability.2.1.2 Funding liquidity
The Basel Committee of Banking Supervision defines funding liquidity as the ability of banks to meet their liabilities, unwind or settle their positions as they come due (BIS, 2008)[n.11] Similarly, the IMF provides a definition of funding liquidity as the ability of solvent institutions to make agreed upon payments in a timely fashion. However, references to funding liquidity have also been made from the point of view of traders (Brunnermeier and Pederson, 2007) or investors (Strahan, 2008), where funding liquidity relates to their ability of raise funding (capital or cash) in short notice. All definitions are compatible (see a relevant discussion in Drehmann and Nikolaou, 2008). This can be clearly seen in practice, where funding liquidity, being a flow concept, can be understood in terms of a budget constraint. Namely, an entity is liquid as long as inflows are bigger or at least equal to outflows. This can hold for firms, banks, investors and traders. This paper mainly focuses on the funding liquidity of banks, given their importance in distributing liquidity in the financial system.
[n.11] Basel Committee on Banking Supervision (2008), paragraph 1.It is therefore useful to consider the liquidity sources for banks.
- A first one is, as already seen, the depositors, who entrust their money to the bank.
- A second is the market. A bank can always go to the asset market and sell its assets or generate liquidity through securitisation, loan syndication and the secondary market for loans, in its role as “originator and distributor”[n.12] Moreover, the bank can get liquidity from the interbank market,[n.13] arguably the most important source of liquidity.
- Finally, a bank can also choose to get funding liquidity directly from the central bank. In the euro system, this is possible by bidding in the open market operations of the ECB (see Drehmann and Nikolaou, 2008 for an extended analysis of the sources and their importance).
[n.12] In doing so, banks also create market liquidity, because they create a credit market with the bank being the market maker (Strahan, 2008). This is an important insight, which helps to understand the linkages between funding and market liquidity.
[n.13] The interbank market is the market where banks can trade with each other loans of very short horizons (over-night) secured or unsecured.2.1.3 Market liquidity
The notion of market liquidity has been around at least since Keynes (1930). It took a long time, however, until a consensus definition became available. A number of recent studies define market liquidity as the ability to trade an asset at short notice, at low cost and with little impact on its price. It therefore becomes obvious that market liquidity should be judged on several grounds. The most obvious would be the ability to trade. Moreover, Fernandez (1999) points out that “(market) liquidity, as Keynes noted [...] incorporates key elements of volume, time and transaction costs. Liquidity then may be defined by three dimensions which incorporate these elements: depth, breadth (or tightness) and resiliency.” [n.14] These dimensions ensure that any amount of assets can be sold anytime within market hours, rapidly, with minimum loss of value and at competitive prices.
[n.14] A market is deep, when a large number of transactions can occur without affecting the price, or when a large amount of orders lies in the order-books of market-makers at a given time, i.e. the number of available buyers and sellers is large. A tight market is a market where transaction prices do not diverge from mid-market prices. Finally, in a resilient market price fluctuations from trades are quickly dissipated and imbalances in order flows are quickly adjusted. According to Liu (2006), they can be summarised into four characteristics of liquidity: Trading quantity, trading speed, trading cost and price impact.
( ... ... )
For the purpose of this project we are going to focus on two types of market liquidity. The liquidity in the interbank market, where liquidity is being traded among banks and the liquidity in the asset market, where assets are being traded among financial agents. These two types, as already seen, are the main sources for a bank to acquire funding liquidity from the markets and therefore can help us explain interactions between the various liquidity types.
2.2 Liquidity risk
Risk relates to the probability of having a realisation of a random variable different to the realisation preferred by the economic agent.[n.15] In our context the economic agent would have a preference over liquidity. In that sense, the probability of not being liquid would suggest that there is liquidity risk. The higher the probability, the higher the liquidity risk. ( ... ... )
2.2.1 Central bank liquidity risk
( ... ... )
...For the purpose of this project we are going to focus on two types of market liquidity. The liquidity in the interbank market, where liquidity is being traded among banks and the liquidity in the asset market, where assets are being traded among financial agents. These two types, as already seen, are the main sources for a bank to acquire funding liquidity from the markets and therefore can help us explain interactions between the various liquidity types.
2.2 Liquidity risk
Risk relates to the probability of having a realisation of a random variable different to the realisation preferred by the economic agent.[n.15] In our context the economic agent would have a preference over liquidity. In that sense, the probability of not being liquid would suggest that there is liquidity risk. The higher the probability, the higher the liquidity risk. ( ... ... )
2.2.1 Central bank liquidity risk
( ... ... )
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