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Mr. Se-Jik Kim and Mr. Ashoka Mody

. Viewing such early bailouts, depositors of all the banks whose liquidity condition will be revealed only in the future (including the otherwise sound banks) may lose confidence (i.e., expectation that their deposits will be fully protected) and run to withdraw their deposits. To prevent such an economy-wide loss of confidence, the government may need to reassure depositors that there will be no liquidity shortage in the future. For this, the government may, by closing illiquid banks today, save sufficient liquidity to bail out all the illiquid banks in the future. In

International Monetary Fund

of some aspects of liquidity condition analysis in Vulnerability Exercises regularly conducted by staff also seems warranted. Risk assessments would be further informed by focusing on country-specific effects of global liquidity conditions. 32. Going forward, further work would help expand our understanding of the drivers and effects of global liquidity, and its implications for surveillance . A key challenge for the profession is identifying the price and non-price factors driving the supply of global funding, and exploring their general equilibrium properties

Mr. Frank Hespeler and Felix Suntheim
This note analyzes the stress experienced (and caused) by open-end mutual funds during the March COVID-19 stress episode, with a focus on global fixed-income funds. In light of increased valuation uncertainty, funds experienced a short period of intense withdrawals while the market liquidity of their holdings deteriorated substantially. To cover redemptions, afflicted funds predominantly shed liquid assets first—for example, cash, cash equivalents, and US Treasury securities. But forced asset sales amplified price pressures in markets and contributed to liquidity falling across fixed-income markets. This drop in market liquidity, as well as the general stress in financial markets, may have led to fund investors becoming even more sensitive to challenging portfolio performance and encouraged further withdrawals. Only after central banks intervened, directly and indirectly supporting asset managers, did liquidity and redemption stress subside. Overall, the March episode validated the financial-stability concerns about liquidity vulnerabilities in the fund industry and calls for further action to address them.