Daniel K Tarullo: Liquidity regulation
Speech by Mr Daniel K Tarullo, Member of the Board of Governors of the Federal Reserve
System, at the Clearing House 2014 Annual Conference, New York City, 20 November 2014.
* * *
The financial turbulence of 2008 was largely defined by the dangers of runs - realized,
incipient, and feared. Facing deep uncertainty about the condition of counterparties and the
value of assets serving as collateral, many funding markets ground to a halt, as investors
refused to offer new short-term lending or even to roll over existing repos and similar
extensions of credit. In the first instance, at least, this was a liquidity crisis. Its fast-moving
dynamic was very different from that of the savings and loan crisis or the Latin American debt
crisis of the 1980s. The phenomenon of runs instead recalled a more distant banking crisis -
that of the 1930s.
Despite this defining characteristic of the last crisis, measures to regulate liquidity have
byand-large lagged other regulatory reforms, for at least two reasons. First, prior to the crisis
there was very little use of quantitative liquidity regulation and thus little experience on which
to draw. While the Basel Committee got to work quickly, senior central bankers and heads of
bank supervisory agencies extended the timeline for implementation of liquidity standards to
guard against unanticipated, undesirable consequences from these innovative regulatory
efforts. A second reason liquidity regulation has followed other reforms is that judicious
liquidity regulation both complements, and is dependent upon, other important financial
policies - notably capital regulation, resolution procedures, and lender-of-last-resort (LOLR)
practice. Work on liquidity regulations has both built on reforms in these other areas and
occasioned some consideration of the interaction among these various policies.
But while perhaps a bit drawn out, the work has proceeded. A final version of a Liquidity
Coverage Ratio (LCR) was agreed internationally and has been adopted by regulation in the
United States.1 The Basel Committee's recently announced final Net Stable Funding Ratio
(NSFR) is another significant milestone in building out a program of liquidity regulation.
Today I would like to take stock of the progress that has been made. I will first describe the
role of liquidity regulation, including how it relates to those other dimensions of regulation I
mentioned a moment ago. Next, I will review the specific liquidity regulatory and supervisory
measures that have been put in place or are in the process of development. In concluding, I
will offer an interim appraisal of our approach to liquidity regulation and identify some of the
issues that remain.
The role of liquidity regulation
Liquidity vulnerabilities are, of course, inherent to most forms of financial intermediation. The
canonical case is that of maturity transformation by a very conventional bank, which takes
demand deposits and uses the funds to make loans that are repaid only over time. Should an
unusual number of depositors want to withdraw their funds, for whatever reason, the bank
may not have sufficient cash on hand to meet those demands. And, because the value of
most of the bank's loans will be difficult for outsiders to determine, they can be sold to
generate more cash only at a significant discount and probably not as quickly as the bank's
liquidity needs might dictate. If depositors other than those initially seeking to withdraw funds
hear that the bank may have difficulty meeting the demand, they may be motivated to join the
withdrawal line before the bank runs out of cash entirely or, even worse, becomes insolvent.
This, of course, leads to a bank run.
The classic responses to this classic problem have been a combination of deposit insurance
and discount window access. The former, established as part of New Deal banking reforms,
assures depositors that they need not worry about insolvency, thereby presumably keeping
out of the withdrawal line depositors who thought they might lose their funds entirely. The
latter gives the bank access to short-term liquidity in order to meet the demands of
depositors who have an immediate need for cash. Regulatory requirements were imposed to
guard against the moral hazard that both programs could create. The resulting system meant
that there were relatively few liquidity problems in the deposit-funded commercial banking
system over the ensuing few decades.
Beginning in the 1970s, deposits began to decline as a proportion of funding for credit
intermediation, as the separation of traditional lending and capital markets activities
established by New Deal financial regulation began to break down. During the succeeding
three decades, these activities became progressively more integrated, as credit
intermediation relied more heavily on capital market instruments sold to institutional
investors. Over time, these markets became - like traditional commercial banks - an
important locus of maturity transformation, which in turn led to both an expansion and
alteration of traditional money markets. Ultimately, there was a vast increase in the creation
of so-called cash equivalent instruments, which were supposedly safe, short-term, and liquid.
When, in 2007, questions arose about the quality of some of the assets on which this
intermediation system was based - notably, those tied to poorly underwritten subprime
mortgages - a classic adverse feedback loop ensued. Investors formerly willing to lend
against almost any asset on a short-term, secured basis were suddenly unwilling to lend
against a wide range of assets. Liquidity-strained institutions found themselves forced to sell
positions, which placed additional downward pressure on asset prices, thereby accelerating
margin calls on leveraged actors and amplifying mark-to-market losses for all holders of the
assets. The margin calls and booked losses would start another round in the adverse
feedback loop. In short, the financial industry in the years preceding the crisis had been
transformed into one that was highly susceptible to runs on the short-term, uninsured cash
equivalents that funded longer-term extensions of credit.2
Designing and implementing a policy response in light of the vulnerabilities of short-term
wholesale funding markets that were revealed in the 2007-09 crisis is an integral part of
post-crisis reform. The key question is how to balance the important role these markets have
come to play in funding economic activity with the need to contain the destabilizing risks of
runs in these same markets. To get a better sense of the terms of this balancing effort, let me
examine the implications, first, of relying completely on liquidity requirements to manage
liquidity problems, and then of relying entirely on LOLR liquidity from a central bank. The
shortcomings associated with either of these one-dimensional approaches demonstrate why
liquidity regulation and LOLR should be viewed as complements and not substitutes.3
Consider first a regime in which there is no LOLR and, thus, financial intermediaries are left
to self-insure against liquidity risk. Absent regulation, in normal times firms might choose to
"underhoard" liquidity, to use Jean Tirole's term.4 As Tirole explains, firms may be
incentivized to sacrifice some insurance in order to buy more illiquid (and presumably
higheryielding) investments. This choice raises the prospect of huge negative externalities, since
each firm may hold a smaller buffer than is socially optimal. Were a liquidity stress to arise,
particularly one following an asset price shock that broadly affected financial intermediaries,
the result could be the kind of freezing up of financial system gears that took place a few
years ago, with consequences for the broader economy that went well beyond the effects on
specific markets or institutions.
Assume, then, that regulation is put in place to force intermediaries to internalize all the
liquidity costs of even the most severe, low-probability systemic events. Firms would have to
demonstrate that they either maintained more or less matched durations of their assets and
liabilities in the steady state or, what in some circumstances could amount to much the same
thing, have liquidity buffers sufficient to meet all liquidity demands even during a systemic
event following a major shock to asset values. Such an approach would entail two major
costs. First, such a requirement would significantly constrain the level of liquidity and maturity
transformation in normal times, surely resulting in significant constraints on credit extension,
with consequent negative effects on economic growth. A primary economic function of banks
and other financial intermediaries is facilitating liquidity management throughout the
economy. Demand deposits and other short-term bank liabilities are safe, easy-to-value
claims that are well suited for transaction purposes and provide money-like benefits to firms
and households.5
Second, in a world without LOLR, shortages of liquid assets would be exacerbated during
stress episodes. Banks would likely hoard their liquidity buffers. Knowing they must rely only
on their own liquidity to meet demands even as market uncertainty is increasing and asset
values suffer downward pressure, banks would have to reduce dramatically their core
intermediation function. They would be reluctant to lend to firms and households that are
themselves subject to the impact of the systemwide liquidity shocks. These real-economy
actors would thus be unable to fulfill their own financial obligations in a timely fashion or
would pare back their own activities out of concern about their ability to do so. Another
adverse feedback loop could result. Even without liquidity regulation and with an LOLR, there
is a tendency to hoard liquidity during periods of financial instability, as evidenced between
2007 and 2009 when banks actually increased their balance sheet liquidity instead of running
down their liquidity buffers.6
It is worth noting that this very dynamic helped motivate the creation of the Federal Reserve.
If solvent banks are confident that they will be able to borrow from the central bank against
good collateral to meet any unforeseen funding needs, then they need not completely stop
lending even amid increased uncertainty about future funding needs. Lending by the central
4
Jean Tirole (2011), "Illiquidity and All Its Friends," Journal of Economic Literature, vol. 49(2), pp. 287-325, at
p. 295. Tirole introduces the term in a general discussion of firm incentives, not in the context of LOLR (which
he addresses later). But the incentives would seem even stronger where LOLR is available.
5
Banks also provide liquidity to operating firms via committed lines of credit, which are more efficient, in
conditions of uncertainty, than an arrangement in which each operating firm attempts to hold sufficient funds in
advance to meet potential liquidity needs, as discussed in Holmstrom and Tirole (1998), "Private and Public
Supply of Liquidity," Journal of Political Economy, vol. 106(1), pp. 1-40.
6
See Carlson, Duygan-Bump, and Nelson (forthcoming). Mark Carlson (2013) presents evidence that this was
also a very typical dynamic of liquidity crises historically, when reserve requirements were used to promote
bank liquidity in the absence of a central bank that could add liquidity to the financial system; see "Lessons
from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity (PDF),"
Finance and Economics Discussion Papers 2013-11 (Washington: Board of Governors of the Federal
Reserve System).
bank is an essential tool to address liquidity stress and to mitigate - though not eliminate -
the externalities imposed on the real economy through defensive hoarding by intermediaries.
The importance of lending by the central bank is emphasized in much of the economics
literature, where LOLR is often viewed as the optimal policy tool.7
Consider now the opposite approach to dealing with liquidity stress, one that relies largely on
the LOLR function of the central bank. If the problem with complete reliance on
selfinsurance is that firms would ration liquidity too tightly in normal times and hoard it in periods
of stress, the obvious problem with a readily available LOLR is that firms would maintain only
the liquidity needed for operations in normal times and do essentially no self-insuring for
periods of stress.
Some might argue that this state of affairs is not actually problematic, so long as the
intermediaries are sufficiently capitalized to remain solvent under stressed circumstances.
The theory of LOLR lending rests on institutions being fundamentally solvent. Central bank
provision of liquidity is not intended to prop up weak or insolvent institutions. Rather, the
objective is to facilitate financial intermediation generally, and maturity transformation in
particular, by relieving unusual liquidity strains associated with periods of financial stress.
Indeed, to support their independence and to guard against their engaging in fiscal policy,
central banks are correctly permitted to take on only a small amount of credit risk. Thus, most
advocates of expansive LOLR programs would readily agree with the need for strong capital
standards, so as to limit the number of occasions on which market participants run because
they question the solvency of a firm, and to provide a solid basis for LOLR extensions of
liquidity by insulating the central bank from credit risk.
It is surely important to maintain strong capital standards. And it is true that the prudential
supervisory role of a central bank may at times give it greater insight into the balance sheet
of regulated institutions, such as through well-developed supervisory stress tests. In practice,
however, the line between illiquidity and insolvency can be very blurry. Particularly in periods
of stress, when the value of important asset classes may be quite volatile and very difficult to
determine, the central bank cannot always easily disentangle illiquidity and insolvency risks.
For the same reasons that an expansive LOLR can create the risk of central banks assuming
more than small amounts of credit risk, it can also create moral hazard. Models in economic
literature that conclude the socially optimal policy is for the central bank to backstop
aggregate liquidity risk generally assume that credit risk is negligible (or can be priced
perfectly) and the only source of risk is that related to liquidity. In this abstract world, there is
no moral hazard, at least in the sense that the firm with access to the LOLR will hold an
insufficient quantity of liquid assets. This is because all assets are effectively liquid, since the
central bank can always lend against assets that may be illiquid in private markets.
Outside the world of theory, however, moral hazard is a significant problem. The central bank
will sometimes be asked to lend to a financial institution precisely because its creditors are
pulling back out of concern that the institution may not be able to meet its obligations. Even if
the central bank were appropriately reluctant to increase moral hazard by stepping in for
private funding when an institution is in fact insolvent, the prospect of a rapid, disorderly
default could still motivate LOLR lending. The reasoning would be that central bank lending
in such a situation could provide a bridge to an acquisition, a more orderly failure, or an
internally generated recovery of the institution. Any of these outcomes would forestall fire
sales of assets or a default that could cascade across the financial system. But while LOLR
lending might be the best of a bad set of choices when confronted with those circumstances,
those frantic efforts are the very situations that pose the highest risk of the central bank
taking on mispriced credit risk. The prospect - perhaps even expectation - of such action
can foster significant moral hazard.
While the central bank can, to some extent, control the potential moral hazard by pricing
credit risk correctly or, more practically, by reducing credit risk close to zero by taking a large
amount of collateral, this approach could at times actually compound liquidity stress. If the
central bank requires so much collateral that the risk to other short-term creditors rises, then
those creditors have an even greater incentive to run, thereby exacerbating the situation and
complicating a bankruptcy or orderly liquidation proceeding. Similarly, if central bank lending
facilitates exit by the uninsured depositors of a troubled bank, the costs borne by remaining
creditors or the deposit insurance fund will increase. Indeed, it is for this reason that the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) placed
restrictions on discount window lending by the Federal Reserve to undercapitalized banks.8
Thus, while liquidity regulation should not require self-insurance against low probability,
severe systemic events, it has an important role to play alongside capital regulation and
resolution mechanisms in reducing the likelihood of systemic events and making them more
manageable when they do occur. It can serve both as a tax and a mitigant to offset the
externalities associated with liquidity risk.9
There is an additional role for liquidity regulation, one suggested by much of the preceding
discussion. When a firm faces a run on its funding, it is likely either insolvent or in a condition
that makes an assessment of its solvency difficult for counterparties, investors, and
regulators. That is, by this point the capital position of the firm is perceived as sufficiently
uncertain so as to call into question its continued viability. Liquidity regulation can ensure
that, even in these circumstances, officials have at least a bit of time to assess liquidity
troubles and the underlying condition of the firm, as well as the degree to which the troubles
are idiosyncratic or systemic. With appropriate insolvency mechanisms available, authorities
can then decide whether the firm will recover or needs to be placed into a resolution or
liquidation regime, while proceeding in a manner consistent with the Dodd-Frank Act
injunction that LOLR measures in exigent circumstances are not to be used for the benefit of
a single firm.
This is not to say that everything will always proceed smoothly, of course. But such an
approach can extend the proverbial runway for a troubled firm and help avoid repeats of the
situation six years ago, when policymakers confronted with chaotic financial conditions had
little time to react and few available tools other than government liquidity and, eventually,
capital injections.
Bank liquidity regulation and supervision
After a somewhat lengthy gestation period, there has been considerable recent progress on
measures that reflect the role for liquidity regulation I have just described. The U.S. banking
agencies have worked with other regulators in the Basel Committee on Banking Supervision
to develop two quantitative liquidity standards - the LCR and the NSFR. These standards
complement the bank capital framework and resolution mechanisms that have been agreed
internationally. They will also help central banks limit the use of LOLR. In addition, as I have
previously noted, the Federal Reserve is working on a proposal to tie risk-based capital
surcharges for each U.S. global systemically important bank (G-SIB) to that G-SIB's reliance
on short-term wholesale funding.10 Together, these standards are designed to mitigate the
risks associated with banks' reliance on unstable funding structures and to encourage them
to embrace more resilient funding models.
Under the LCR, banking organizations11 must hold a buffer of high-quality liquid assets
sufficient to cover net cash outflows during a 30-day stress scenario. This requirement
serves several of the purposes discussed earlier. A buffer of high-quality liquid assets is a
form of self-insurance against liquidity risk that allows banks to meet short-term needs in the
event of creditor runs. Because holding the buffer is likely to be somewhat costly, the LCR
should also encourage banks to reduce use of very short-term wholesale funding that
increases buffer requirements. The buffer will also provide central banks and other national
authorities time to assess the financial condition of a firm encountering liquidity difficulties
and to determine the extent to which these difficulties are a function of essentially
firmspecific factors or a harbinger of market-wide funding stress.
A revised version of the NSFR has recently been released by the Basel Committee.12 It
complements the LCR by looking beyond a 30-day period to achieve a stable funding profile
for firms more generally. In this regard, it is important to recall that the deterioration of
funding markets began well before the financial crisis reached its acute stages. In the
summer of 2007, responding to signs of trouble in the subprime mortgage markets, creditors
reduced the maturities of funding they were willing to provide to financial intermediaries that
had been creating and holding securities backed by subprime - and eventually other -
mortgages.13 This process left those intermediaries in increasingly fragile funding positions,
and by the time Lehman Brothers collapsed in September 2008, the system was primed for a
devastating run. Given the possibility of this type of sustained erosion of firm funding
structures over an extended period, simply requiring firms to hold a liquidity buffer against
30-day outflows, as required by the LCR, would be insufficient.
While there is thus a need for a longer-term structural standard such as the NSFR, the
conceptual challenges in crafting it were greater than in designing the LCR. Simply extending
the LCR to one-year - that is, requiring firms to hold enough liquidity to survive a one-year
funding market freeze - seemed the kind of excessive self-insurance that would lead to
undesirably reduced maturity transformation and financial intermediation. So a different set of
standards needed to be developed, which themselves occasioned considerable discussion
about the effects and incentives they would create. Also, one could argue that the NSFR
should have aimed for a more complete term structure in order to protect against maturity
mismatches within and beyond the one-year mark, and to create stronger incentives for firms
to extend the maturity of their funding arrangements.
Considerable attention was paid to these and other concerns during the consultative and
deliberative processes in the Basel Committee. As I mentioned earlier, the seriousness with
which central bankers and regulatory agencies took these concerns is evidenced by the fact
that the NSFR was subject to considerable revision over the last four years. I anticipate we
will hear similar, and perhaps additional concerns, from a variety of perspectives when the
federal banking agencies issue a proposed rule next year to implement the NSFR in the
United States. This process should result in a regulation that reduces the probability of banks
coming under short-term funding pressures. Maintaining more stable funding, such as retail
deposits and term funding with maturities of greater than six months, will help avoid the spiral
of fire sales of illiquid assets that deplete capital and exacerbate market stress.
Unlike the LCR - and the originally finalized version of the Basel NSFR - the newly finalized
NSFR also begins to address the risks associated with matched books of securities financing
transactions. On its face, a perfectly matched book might seem to pose little risk to the firm,
since it could run off assets as it lost funding. In reality, however, a firm may be reluctant to
proceed in so symmetrical a fashion. In such a context, "running off assets" may mean
denying needed funding to clients with which the firm has a valuable relationship. Moreover,
even if the firm does run off assets, a firm with a large matched book will almost surely be
creating liquidity squeezes for these other market actors. To partially address these risks, the
NSFR will require firms to hold some stable funding against short-term loans to financial
firms.
Under the enhancement of the international G-SIB surcharge being developed by the
Federal Reserve, the formula used to set risk-based capital surcharge levels for U.S. G-SIBs
would incorporate each U.S. G-SIB's reliance on short-term wholesale funding. Greater
reliance on short-term wholesale funding leaves firms more vulnerable to runs that impose
externalities on the entire financial system. Requiring higher capital levels at such firms will
improve their chances of maintaining access to market funding in periods of stress by
providing greater assurance of their solvency to counterparties.
The LCR and NSFR developed in the Basel Committee are path-breaking measures that
create quantitative liquidity requirements. Still, they do not fully cover all facets of liquidity
risk. We are trying to address those residual risks in two ways - first, by adding certain
requirements in our domestic implementation of the international standards and, second,
through our supervisory program.
As to augmenting the international standards, let me give two examples. First, the Basel LCR
does not impose any regulatory charge on a bank's use of overnight funding to fund assets
that mature in less than 30 days. This lacuna leaves open the possibility of a significant
maturity mismatch within the 30-day LCR window. The U.S. LCR fills this gap by imposing a
regulatory charge on maturity mismatch within the 30-day period.14 Second, because the
Basel LCR and the NSFR each calculate the liquidity position of a firm on a fully consolidated
basis, neither adequately addresses the risk that stress could occur in one part of the
organization while the liquidity needed to deal with that stress is trapped in another. In the
U.S. LCR, a holding company may include in its consolidated liquidity buffer only qualifying
assets held by a subsidiary U.S. bank that are in excess of the amount of the projected net
cash outflows of the subsidiary bank and that can be transferred to the holding company
without statutory, regulatory, supervisory, or contractual restrictions. The Federal Reserve
has also adopted rules requiring certain foreign banking organizations (FBOs) with large U.S.
operations to hold financial resources in the United States commensurate with their U.S.
liquidity risk.15
Supervisory programs are also being used to supplement the Basel measures, in a manner
roughly comparable to our practice in the area of capital regulation. The very nature of
quantitative liquidity standards means the effectiveness of the rules could wane over time
because of changes in funding markets, reductions in the liquidity of assets previously
deemed liquid, or regulatory arbitrage. Furthermore, it is difficult for any standardized
quantitative liquidity regulation to capture all relevant risks. For instance, a bank's short-term
funding can be more or less stable depending on the structural characteristics of a firm's
funding providers. The LCR distinguishes between broad categories of funding
counterparties, such as financial institutions and non-financial companies. But it does not
differentiate in a more granular way among entities that may behave very differently under
stress, such as traditional banks and money market mutual funds.16
To complement the LCR and NSFR, in 2012 the Federal Reserve launched the
Comprehensive Liquidity Assessment and Review (CLAR) for firms in the Large Institution
Supervision Coordinating Committee (LISCC) portfolio.17 Like the Comprehensive Capital
Analysis and Review (CCAR), CLAR is an annual horizontal assessment, with quantitative
and qualitative elements, overseen by a multidisciplinary committee of liquidity experts from
across the Federal Reserve. In CLAR, supervisors assess the adequacy of LISCC portfolio
firms' liquidity positions relative to their unique risks and test the reliability of these firms'
approaches to managing liquidity risk. CLAR provides a regular opportunity for supervisors to
respond to evolving liquidity risks and firm practices over time.
CLAR involves evaluations of firms' liquidity positions both through a range of supervisory
liquidity metrics and through analysis of firms' internal stress tests. A variety of liquidity
indicators, such as funding concentrations, measure vulnerabilities beyond those captured in
the LCR; the measurements are made over a number of time horizons. In parallel to this
quantitative assessment, supervisors also examine the stress tests that each firm uses to
make funding decisions and to determine its liquidity needs. Recent CLAR work on the firms'
own stress testing practices has focused, among other issues, on assumptions regarding
liquidity needs for capital markets activity, such as prime brokerage services and derivatives
trading. As with CCAR, this analysis helps inform supervisors of the reliability of firms' own
risk measurement and management.
Though similar to CCAR in some respects, CLAR does not include a specific quantitative
post-stress minimum. Of course, LISCC firms will be required to meet the LCR, which is itself
a forward-looking requirement for a buffer against a potential stress on liquidity. In addition,
firms with weak liquidity positions under CLAR's liquidity metrics are directed to improve their
practices and, as warranted, their liquidity positions, through supervisory direction, ratings
downgrades, or enforcement actions. Because CLAR assesses all LISCC firms
15
FBOs with combined U.S. assets of $50 billion or more must meet liquidity risk-management standards and
conduct internal liquidity stress tests. An FBO's U.S. intermediate holding company must maintain a liquidity
buffer in the United States based on the results of a 30-day liquidity stress test. The U.S. branches and
agencies of an FBO must maintain a liquidity buffer in the United States equal to the liquidity needs for
14 days, as determined by an internal liquidity stress test. In addition, the Board has indicated that it intends to
apply the Basel III liquidity rules to large U.S. operations of FBOs. These requirements are comparable to
local liquidity requirements imposed by the United Kingdom Prudential Regulation Authority, although the
authority's branch-level liquidity requirements are somewhat more flexible.
16
Similarly, the effective liquidity of short-term loans that a bank may count as an inflow under the LCR is in part
dependent on the nature of the bank's relationship with the borrower. A bank's liquidity risk-management
framework should recognize that, even under stress, it may be reluctant to refuse to roll over short-term credit
to customers that it would like to retain in the longer run.
17
See www.federalreserve.gov/bankinforeg/large-institution-supervision.htm for a current list of firms in the
LISCC portfolio.
simultaneously, the Federal Reserve is also able to compare the range of practices in
liquidity risk management across the portfolio. Qualitative deficiencies identified in CLAR,
such as questionable internal stress testing regimes, are addressed through the same set of
supervisory tools. Knowledge gained through CLAR assessments also provides a
macroprudential perspective on liquidity vulnerabilities and funding concentrations in the
system as a whole.
An interim appraisal of liquidity regulation
The financial crisis revealed the need for prudential regulation to consider systemic
vulnerabilities, as well as weaknesses in traditional regulation aimed at assuring the financial
condition of individual firms. Both microprudential and macroprudential shortcomings were
never as apparent as in the series of runs and general funding stress that defined much of
the crisis. Today, as I hope I have adequately explained, we have a better appreciation for
the role liquidity regulation should play in tandem with capital regulation and resolution
mechanisms, and as a means for both complementing and limiting the LOLR function of
central banks. We are well along the road of implementing regulatory and supervisory
policies to play that role. Even though these measures are in some cases still under
development and in others still being phased in, the liquidity positions and management
practices of LISCC firms have improved considerably over the past few years. Since 2012,
the LISCC firms' combined buffer of high-quality liquid assets has increased by about a third,
and t