They need liquidity in times of stress but it is costly to hold in normal times. Their reactions, however, are opposite. Private institutions tend to underestimate their liquidity needs because, in case of shock, the Central Bank can step in as a lender of last resort. For countries, the bias goes in the other direction. Provision of international liquidity, whether private or official, is contingent, conditional and uncertain. With no international lender of last resort, financial stability motives could lead to unlimited accumulation of liquidity. Internationalisation of finance has created a fundamental indeterminacy in the demand for reserves. As a consequence, past benchmarks used to assess the adequacy of reserves are no longer valid. Current research (Obstfeld et al. 2009 ) shows that broad domestic money aggregates may be the best explanatory factors for the amount of reserves. Multilateral provision of international liquidity: the search for financial safety nets The rationale for a multilateral source of liquidity provision is straightforward: stabilizing the demand for international reserves would bring huge benefits in terms of world welfare. At the moment, reserve accumulation can only occur through a conjunction of balance of payment surplus and some degree of exchange rate intervention and creates externalities for other countries. Now, suppose there is “ex ante” an existing pool of reserve assets which countries could tap into under specific circumstances. If access to this pool is credible and predictable, there would be no need for getting those reserves from the market.
Our economies and our societies have suffered heavily – indeed, on all available forecasts, this year will see the biggest declines in GDP recorded in peacetime – and we will have to endure a period of painful reconstruction for which sound knowledge and also good judgment will be essential. 1/1  BIS central bankers' speeches