These requirements reduce liquidity risk for each institution but neglect the systemic dimension of liquidity, and might be very costly in terms of limitations to maturity transformation, an essential function of the financial system for which there is high demand.13 An alternative proposal would impose liquidity risk charges or levies that penalise short-term funding, still at the individual level;14 to help ease funding pressures on banks during a systemic liquidity crisis one could think of instruments with contingent maturity.15 In fact, at the moment the thinking on the prevention of liquidity crises is still ongoing; to mitigate acute liquidity shocks, as we have seen in the recent past, there is still no substitute for a determined intervention by central banks, even beyond the boundaries of their standard activity.
During a crisis, individual banks’ liquidity positions matter since those perceived to be more risky might be excluded from the market;16 in this case, only the central bank can make the market for liquidity function, by acting as a central counterparty.