agnes benassy - quere : banks'liquidity in volatile macroeconomic and market environments speech by ms agnes benassy - quere, second deputy governor of the bank of france, at the joint conference by the research group of the basel committee on banking supervision, the bank for international settlements and the centre for economic policy research, basel, 15 - 16 may 2024. * * * presentation accompanying the speech introduction i am very glad to be here today to share some thoughts on the very topical issue of banks'liquidity. let me start with a quote of franklin allen and douglas gale ( 2017, p. 25, slide 2 ) : " with capital regulation there is a huge literature but little agreement on the optimal level of requirements. with liquidity regulation, we do not even know what to argue about. " this quote highlights the elusive and undefined nature of bank liquidity. liquidity risk is inherent in the banks'business model due to the maturity transformation function of banks : banks'balance sheets are made of short - term resources on the liability side ( on - sight deposits and short - term debt ) ; and medium - to long - term assets on the asset side. furthermore, resources are mostly liquid, whereas some assets ( especially loans ) are illiquid. finally, asset liquidity may greatly vary over time. as made clear in the seminal paper by diamond and dybvig ( 1983 ), the maturity mismatch may give rise to multiple equilibria and sudden transitions from tranquil times to bank runs. hence the crucial role of liquidity requirements, deposit insurance and the lender of last resort. and more generally, of all micro - and macro - prudential regulations, and financial safety nets that contribute to the confidence of depositors and creditors. the 2007 / 2008 liquidity crisis was a brutal wake - up call. the regulatory response was the introduction of internationally - agreed liquidity ratios ( liquidity coverage ratio – lcr ; and net stable funding ratio - nsfr ). these regulations were recently tested in an environment of monetary policy tightening. another lesson from the global financial crisis was that market liquidity and funding liquidity reinforce each other ( brunnermeier and pedersen, review of financial studies 2009 ). regulators need to take this interaction into account. against the risk of liquidity crises, we have made the financial system more resilient. but new vulnerabilities and transmission channels have appeared in recent

nbfis do not have direct access to the lender of last resort. so there is a risk that illiquid assets migrate from banks to non - banks such as real - estate funds, while these funds would be relying on credit lines from the banks in case they need liquidity ( acharya et al. 2024 ). fire sales are also a powerful channel of spillover ( these are pecuniary externalities ). vice - versa, money market funds are an important source of funding for banks. 4. in stress periods, banks may face a trade - off between deleveraging and providing liquidity to the market. for instance, a bank that holds excess reserves at the central bank will increase its leverage ratio if it provides that liquidity to another bank or to a non - bank through a repo operation. and this, at the very moment when money market funds ( for instance ) tend to withdraw 2 / 9 bis - central bankers'speeches liquidity from the market, because of actual needs or in order to build up reserves. deleveraging dynamics may then call for the central bank to step in and provide liquidity in last resort. 5. with the central clearing requirements for derivatives, regulators have addressed counterparty risk. however, margin calls in cleared markets necessitate liquidity risk management, as shown recently in the case of british pension funds, or in european energy markets. as pointed out by esrb ( 2017 ) and modelled by aramonte et al. ( 2022 ), procyclical margin calls on derivative markets, and procyclical haircuts on repo markets, tend to amplify leveraging and deleveraging cycles. for instance, spikes in margins will simultaneously trigger dash - for - cash and deleveraging. these factors make a case for a macroprudential approach to liquidity regulation and management ( slide 6 ). let me illustrate with 2 examples : 1. central counterparties ( ccps ) apply margins and haircuts in a time - varying, preemptive and risk - based approach with respect to its participant's credit exposures and with respect to market conditions. according to the international principles for financial market infrastructures, a ccp should address procyclicality in its margin framework. therefore a ccp should adopt forward looking and conservative margin requirements. for example, it may use margin " add - ons " on top of baseline ( or minimum )