the central banks of the crisis economies have roughly tripled base money to offset the retreat in private liquidity. in addition to their monopoly on the creation of official liquidity, central banks employ various facilities to redistribute liquidity in their domestic markets. during periods of stress, repo facilities take in liquidity from risk - averse private institutions and re - offer it ( against good collateral ) to other private institutions. it is in this way that the european central bank ( ecb ) has prevented the most severe effects of the shortages in funding liquidity plaguing european banks. partly as a result of the scale of concerns about counterparty risk, the ecb ’ s balance sheet has risen from 13 to about 20 per cent of gdp since the start of the crisis. although unprecedented, the combination of the ecb ’ s bold moves and €4 trillion in unencumbered collateral at european banks should ensure that there is no european equivalent of lehman. however, measures that avoid disaster are not necessarily sufficient to promote recovery. there are also various ways public authorities can provide the private sector with access to official liquidity in foreign currency – the most traditional of which is drawing on foreign exchange reserves. more recently, central banks have added bilateral swap lines to their arsenals. in the extreme, these resources could be supplemented by conditional loans from the international monetary fund ( imf ). for present purposes, it is important to distinguish between funding and market liquidity. market liquidity is the ability to trade an asset or financial instrument at short notice with little impact on its price. funding liquidity refers to the ability to raise cash either through the sale of an asset or by borrowing. these concepts of liquidity are closely interlinked. bis central bankers ’ speeches private liquidity overall global liquidity conditions are the result of complex interactions among several factors, including macroeconomic policies ( such as the monetary policy stance and exchange rate regime ), microprudential regulations ( such as capital and liquidity rules ), financial market innovation and risk appetite. a key determinant is the financial sector ’ s willingness to provide cross - border financing. this can take the form of direct lending, the provision of market liquidity by banks to securities markets through market making, or funding liquidity to other financial institutions through repos. the conditions under which these intermediaries can fund their own balance sheets, in turn, depend on the willingness of other private sector participants to provide funding or

prices and bolstering growth across the globe. now the cycle is again turning. the ongoing deleveraging of the european banking system is reducing global liquidity, with cross - border credit being pulled from many emerging markets and some u. s. - dollar asset classes. market - making activity is becoming thinner, and private financing is slowing across the world. the volatility of global liquidity in recent years underscores the value of the structural and cyclical policies that can dampen these cycles and channel the flows to their most productive uses. this speech draws heavily on the forthcoming report, “ global liquidity – concept, measurement and policy implications, ” prepared by a group of the committee on the global financial system chaired by jean - pierre landau of the bank of france. bis central bankers ’ speeches defining global liquidity global liquidity is an amorphous concept. the usual suspect for any event or dynamic too complicated to explain, global liquidity is the keyser soze of international finance. it has no agreed definition and, as a consequence, there has been no coherent policy approach to tame its more violent tendencies. at its core, liquidity represents the ease with which financial institutions, households and businesses can obtain financing. 2 global liquidity cannot be understood by simply summing domestic measures of financial conditions. the international components of liquidity ( such as cross - border lending ) will affect market and macroeconomic outcomes in recipient countries, and can have a disproportionately large role in fluctuations in financial stability. to capture all the dimensions of global liquidity requires a combination of price and quantity measures. price indicators, such as the general level of interest rates or credit spreads, provide information about the conditions under which liquidity is provided, while quantity measures, such as credit aggregates, show the degree to which such conditions translate into the build - up of risks. official liquidity overall levels of global liquidity are the product of the levels of official and private liquidity and the complex interactions between the two. official liquidity is funding that is unconditionally available to settle claims through monetary authorities. it can only be created by central banks. core official liquidity is base money, or the sum of currency in circulation and funds held by financial institutions at the central bank. official liquidity has traditionally been small relative to economic activity. before the financial crisis, it was about 5 per cent of gdp in the united kingdom and the united states. in recent years,