Central Banks should Monitor Counterparty Liquidity

Through their open market operations, the trading desks at central banks gain first-hand knowledge of evolving stresses in the inter-dealer funding markets – information which can help to monitor systemic risks.

Bank for International Settlements: A first open question pertains to the governance structure and flow of information in systemic risk regulation. The crisis has shown that central banks play a decisive role in systemic regulation. But it is not entirely clear how central banks need to be equipped to play this role. Especially where the central bank is not the bank supervisor, it is important that the goal be well defined, the instruments understood and the exchange of information with other authorities appropriate - including detailed supervisory information on individual firms.  Financial supervisors can also benefit from information collected by central banks in the context of their liquidity operations.[1]