. for example, the federal reserve introduced the commercial paper funding facility ( cpff ) to reduce rollover risk in the commercial paper market, the federal reserve and other central banks ’ massively expanded the ability of banks to obtain dollar funding through the taf and associated foreign exchange swap programs ; the treasury guaranteed money market mutual fund assets ; and the fdic increased deposit insurance limits and set up the temporary liquidity guarantee program ( tlpg ) to backstop bank and bank holding company debt issuance. having described “ what ” happened on the liquidity front during the crisis, i next want to examine, in a bit more detail, “ why ” it happened. to do this, i will lay out a simple conceptual framework that i will then use to assess what can be done to mitigate the risk of such runs occurring in the future. as a starting point, i will talk about how unsecured lenders react in a crisis, and then i will consider the behavior of secured lenders. unsecured liquidity providers run for two basic reasons. first, they run because there is a risk that the company they are lending funds to is insolvent. in other words, there is a risk that the assets will be worth less than the liabilities, creating the potential for loss to the creditor. the second reason that unsecured creditors run is the risk that they will not be repaid in a timely way. even if the borrowing firm ultimately turns out to be solvent, there may be a delay in a lender getting its funds back, and this delay may prove to be unacceptably costly to the lender. this second cause of liquidity runs – the risk of untimely repayment – is significant because it means that expectations about the behavior of others, or their “ psychology ”, can be important. this is a classic coordination problem. even if a particular lender judges a firm to be solvent, it might decide not to lend to that firm for fear that others might not share the same assessment. the less certain any one lender is about the willingness of other lenders to provide liquidity to a firm, the greater the risk that too few loans will be extended to prevent liquidation. in that case, even if the lender turns out to be correct in its judgment of the firm ’ s solvency, there still will be a cost in terms of delay in receiving repayment. a few pictures can help to illustrate these concepts

is does not have access to an insured deposit funding base, the next stop is often a full - scale liquidity crisis that often cannot be stopped without massive government intervention. fortunately, there are ways to mitigate the risk of a cascade. first, we can require that financial intermediaries hold more capital. this would push the probability distribution to the right in figure 2. with sufficient additional capital, the probability of insolvency could be reduced to a low enough level that liquidity providers would not run. higher capital requirements work to reduce the risk of liquidity runs, but potentially at the cost of making the process of financial intermediation much more expensive. in particular, a requirement that firms must hold more capital increases intermediation costs. moreover, banks may respond to higher capital requirements by taking on greater risk. if an increase in risk - taking were to occur, the movement of the probability distribution to the right in figure 2 might be offset by an increase in the degree of dispersion. thus, higher capital requirements might not necessarily be sufficient to push all of the probability distribution above zero. second, regulators could require greater liquidity buffers. these buffers would help protect the firm against having to liquidate assets under duress, and would therefore help prevent the probability distribution from sliding left toward the zero line in figure 2. but there is a cost to the firm from holding greater liquidity buffers in terms of lower returns on capital. so, requiring greater liquidity buffers would also tend to drive up intermediation costs. and, just as in the case of higher capital requirements, banks could respond by taking greater risks. third, regulators could implement changes that would reduce the degree of dispersion in the potential value of a firm, pushing the right tail of the distribution in figure 2 to the left. for example, we could require greater transparency about the composition and quality of the firm ’ s assets and liabilities. or, regulators could increase transparency by forcing greater disclosure of the sale price of assets and / or by pushing for greater homogeneity and price this problem has been largely addressed in the banking sector by deposit insurance and by providing access to lender of last resort facilities. in addition, supervisory and reporting requirements address transparency issues. discovery for products such as otc derivatives. we could improve the quality of regulation and supervision, which would increase confidence in regulatory measures of capital and financial firms ’ soundness. fourth, the central bank could