On Dec. 18, Basel issued paper on readiness for central bank support.
Basel issued Financial Stability Institute (FSI) insights on policy implementation no 64, entitled Navigating liquidity stress: operational readiness for central bank support.
Overview
2023 banking turmoil showed potentially systemic consequences of liquidity stresses and need for effective central bank lending operations to contain financial instability.
For such operations to be a reliable source of contingency funding, banks must be ready and able to access them; central bank liquidity cannot, and should not, prevent a non-viable bank from failing, but access to central bank lending operations can give authorities time to prepare a resolution, may help limit broader system-wide stress.
Stated that access to central bank liquidity facilities requires a range of steps.
First, banks and central banks need to have the necessary operational capacity.
Second, as central banks only lend on collateralized basis, central banks must value collateral, set haircuts; appropriate legal, operational due diligence process is needed to ensure all risks can be managed - can be complex, lengthy for non-traded assets.
Operational readiness involves sufficient preparation so lending can be accessed quickly when needed; authorities can act to improve banks' operational readiness.
Supervisory guidance can encourage banks to incorporate central bank lending in contingency funding; central banks may also improve operational readiness through regulatory requirements for testing and simulations across all eligible asset classes.
Central banks may also encourage/require banks to preposition assets at central bank.
Also, as fear of stigma may impede banks from using central bank lending, actions to promote operational readiness more effective if complemented by reducing stigma.
