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Liquidity And Monetary Policy

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Executive Summary

In the period leading up to the financial crisis of 2007-2008, financial institutions of all sorts increased their leverage in the wholesale markets, relying heavily on collateralized borrowing in the form of repurchase agreements ('Repos') and issuance of Asset-Backed Commercial Paper (ABCP). As the crisis approached, lenders became nervous and significantly shortened the maturity of the loans they were prepared to make. When the crisis hit, the disappearance of short-term funding created severe problems for many financial institutions. Some large firms failed and further failures were only prevented by the intervention of the central banks.

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