In an internationally coordinated effort, longerterm operations of this kind were intensified in December, in order to meet heightened demand surrounding year-end pressure. In December, the SNB conducted several repo transactions with maturities between three and four weeks to cover year-end requirements. In March, there were three auctions of three-month Swiss franc repos. A consequence of tensions in the money markets was an inefficient distribution of liquidity. While some institutions tended to hoard liquidity, other institutions found it hard to come by. Some central banks therefore enlarged the range of counterparties for their liquidity management operations. A good example of this is the Term Auction Facility (TAF) introduced by the Federal Reserve in December, which provides 28-day term loans. This facility functions essentially like an open market auction, but is open to depository institutions, while access to the Fed’s regular open market operations is restricted to 20 primary dealers. Furthermore, some central banks broadened the range of eligible collateral for their operations. This allowed the banks to keep their best collateral for the money market. Another problem during the crisis was the dollar liquidity shortage of European banks. This resulted in additional uncertainty and in a high intraday volatility of dollar rates. In an internationally coordinated effort, the Federal Reserve therefore, in December, established a US dollar swap line for the ECB and the SNB. On December 17, the SNB, for the first time ever, conducted a repo auction in foreign currency and provided four billion US dollars of liquidity for 28 days to its counterparties.

6  BIS Review 71/2008  Appropriate liquidity facilities The third lesson concerns appropriate liquidity facilities. In order to react quickly and flexibly, central banks must be capable of injecting and withdrawing large amounts of liquidity at short notice. In order to distribute liquidity to banks when the money market is impaired, central banks must also be able to conduct operations with a maximum set of counterparties and against a broad range of collateral. In order to address liquidity premia, central banks should be able to intervene in maturity ranges which are longer than the maturities at which they usually operate. Central banks may also need to enlarge the basket of eligible collateral during a crisis. Furthermore, the crisis has made it clear that the effectiveness of a standing loan facility in times of crisis may be reduced if there is stigma attached to its use. Moreover, central banks should also have alternative plans up their sleeves on how to deal with severe and persistent illiquidity in the money market. The collateral swap facilities are not traditional liquidity management operations aimed purely at injecting liquidity. They provide a temporary relief of banks' balance sheets and therefore indirectly support liquidity in the money market. However, central banks should use such drastic measures only in exceptional cases. Central banks also need exit strategies for such eventualities. Finally, the crisis has also shown that, in order to successfully address financial market turmoil, central banks need enough room to manoeuvre and a liberal legal framework.