december, the federal reserve announced the creation of a temporary term auction facility ( taf ) to provide secured term funding to eligible depository institutions through an auction mechanism. the federal reserve also established swap lines with the european central bank and the swiss national bank, which provided dollar funds that those central banks could lend in their jurisdictions. at the same time, the bank of england and the bank of canada announced plans to conduct similar term - funding operations in their own currencies. the taf function, which i believe has had beneficial effects on financial markets to date, is expected to continue as long as necessary to address elevated pressures in short - term funding markets, and the federal reserve will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives. conclusion if recent events have taught us anything, it is that, during times of market turbulence, banks are essential providers of liquidity to others. to ensure that banks are well positioned to play this critical role, banks need to carefully manage their own exposure to liquidity risks. because liquidity problems can have significant effects on both sides of bank balance sheets, liquidity risks should be evaluated and addressed on an enterprise - wide basis, and should be tightly integrated with capital planning.

anachronisms, and, indeed, much as been written about the " disintermediation " of banks. for all the discussion of disintermediation, however, recent events suggest that depository institutions still play a crucial role in the global economy, particularly during times of turbulence. economists identify two related but distinct basic functions of banks in the economy. first, banks help direct capital to productive investments by identifying and monitoring suitable borrowers. second, banks provide liquidity to both borrowers and depositors. without minimizing the importance of the first function, i would like to focus on banks'role in creating liquidity. randall s. kroszner ( 2007 ), " liquidity and monetary policy, " speech delivered at the u. s. monetary policy forum, washington, march 9. what is liquidity? the term means different things to different people, and it wouldn't surprise me to find about 2, 000 different definitions among the lexis / nexis citations i mentioned earlier. today, i'll use a definition put forward by the bank for international settlements in 2000 : " liquidity is the ability to fund increases in assets and meet obligations as they come due. " as i will discuss in a moment, banks'role as liquidity providers is particularly crucial when markets are under stress. by pooling the assets of many depositors and offering term loans and credit lines to borrowers, banks effectively provide insurance against the uncertain liquidity requirements of households and firms. 2 while the liquidity needs of an individual household or firm may be difficult to foresee, in normal circumstances some individuals'and firms'high demands for liquidity will typically be offset by others'low demands ; hence, on average in normal times, the liquidity needs of large groups of households or firms are reasonably predictable. so when the savings of many investors are pooled together, a significant share of deposits can be used to make productive long - term loans, while a smaller share are held back as reserves to meet depositors'liquidity needs. loan commitments and lines of credit serve a similar function by allowing borrowers with uncertain future liquidity requirements to take on bank debt as needed. banks have been managing expected liquidity demands since the beginning of banking itself. this is accomplished today by, for example, holding some liquid assets such as treasury bills and possibly by funding a share of assets with long - term debt. a mismatch in the duration