9 The balance sheet cost associated with the interbank trade can be thought of as capturing the additional risk introduced into the system by that trade. One side effect of interbank trades is that they create a network of exposures that can contribute to financial fragility, as we saw during the crisis. Central bank liquidity provision Let me now turn to the question of broad-based liquidity provision by central banks. As Ulrich notes, there is an academic literature on the topic that focuses primarily on the incentives that individual financial institutions may have to take on excessive risk if they expect the central bank to provide insurance ex post; an incentive often referred to as moral hazard. This framing had become so pervasive that central bankers relied on constructive ambiguity – the idea that if market participants were unsure about whether the central bank might supply liquidity, they might not be as tempted to take privately beneficial but socially costly actions. I don’t intend to discuss constructive ambiguity, but I find it striking that there is little research on this topic directly related to central banking that could help us think of the costs and benefits of such an approach. 10 More generally, now might be a good time for academics and central bank researchers to take a fresh look at the issues of central bank liquidity provision, taking into account, in particular, stigma and liquidity regulation. 11 Let me start with stigma.
“Liquidity Regulation.” November 20, 2014, speech at the Clearing House 2014 Annual Conference, New York. Tucker, Paul, (2016). “The Political Economy of Central Bank Balance Sheet Management.” May 5, 2016, prepared for a workshop jointly sponsored by Columbia University’s School of International and Public Affairs and the Federal Reserve Bank of New York, New York. 23  See Tucker (2016) for a consideration of these issues. BIS central bankers’ speeches  7  8  BIS central bankers’ speeches  BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11