During periods of stress, however, runs by providers of short-term wholesale funding and associated asset liquidations can result in large fire sale externalities and otherwise undermine financial stability. A dynamic of this type engulfed the financial system in 2008. Since the crisis, the Federal Reserve has taken several steps to address short-term wholesale funding risks.
The Basel III capital framework and the Federal Reserve’s stress testing regime have significantly increased the quantity and quality of required capital in the banking system, particularly for those banking organizations that are the most active participants in short-term wholesale funding markets.