Adrien d'Avernas, Quentin Vandeweyer, Matthieu Darracq Pariès, 20 April 2020

How does the presence of ‘shadow banks’ – non-bank, unregulated financial intermediaries – affect the ability of central banks to tackle a liquidity crisis? To address this question, this column develop an asset pricing model with both bank and non-bank financial institutions. A crucial part of the model is that banks intermediate liquidity between the central bank and non-banks, but this intermediation stops during a financial crisis. Non-banks are then left without a lender of last resort, and central bank liquidity operations with banks are not sufficient to mitigate the crisis. In the stylised model, opening liquidity facilities to non-banks and purchasing illiquid assets are then essential measures to tackle a liquidity crisis.

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