I’m not suggesting that we establish permanent contingency liquidity facilities, just that the Federal Reserve retain the authority to create the tools necessary to meet liquidity needs of groups of nonbank institutions should a panic impair the ability of securities markets, as well as banks, to function and the Board of Governors find that the absence of such functioning would threaten the economy.
3 The collateral would have to be of good quality and the institutions sound to minimize any credit risk to the Federal Reserve. Holding open this possibility is not without cost. With credit potentially available from the Federal Reserve, institutions would have insufficient incentives to manage their liquidity to protect against unusual market events.