Who Will Be Swept Up in the Next Round of Liquidity Rules?
The financial crisis of 2007-08 was a crisis of liquidity. Facing deep uncertainty about the condition of counterparties and the value of collateral assets, investors refused to offer new short-term lending or even to roll over existing repos and similar extensions of credit. As a result, many funding markets ground to a halt. The role liquidity, or rather the sudden lack of liquidity, played in the most recent crisis is unlike that experienced in the savings and loan crisis or the Latin American debt crisis of the 1980s. Consequently, regulators and policy-makers have found the regulation of liquidity to be a new frontier, and one that remains the focus of keen interest to the Federal Reserve. Recently, Fed Board Governor Daniel K. Tarullo outlined his thoughts on both the importance of liquidity regulation, and the direction he sees it heading.