Once we move away from the zero lower bound, this second instrument might continue to be helpful, not simply in providing accommodation, but also as a complement to other efforts on the financial stability front. To see why, recall the central role that maturity transformation – the funding of long-term assets with short-term, run-prone liabilities – can play in propagating systemic instabilities.
Moreover, as illustrated by the mortgage REIT sector that I described earlier, the economic appeal of maturity transformation hinges on the shape of the yield curve – in that particular case, on the spread between the yield on agency MBS and the so-called general collateral (GC) repo rate at which these securities can be funded on a short-term basis.