Once financial conditions become more normal, the extraordinary provision of liquidity by the Federal Reserve will no longer be needed. As Bagehot would surely advise, under normal conditions financial institutions should look to private counterparties and not central banks as a source of ongoing funding. Liquidity regulation and moral hazard The provision of liquidity by a central bank can help mitigate a financial crisis.
Our leading banks have nearly completed their funding programmes for this year, albeit at higher costs and with 40 per cent in the form of covered bond issues. A third of the bank bonds now outstanding will mature by the end of 2012; this is a significant share but similar to that of the main European banks.