Vice Chairman Stanley Fischer is speaking at the Brookings Institution in Washington, on the topic of “Do We Have a Liquidity Problem Post-Crisis?”
Not surprisingly, Fischer’s answer is that “liquidity is adequate by most measures, in most markets, and most of the time” and adds that it is “certainly too soon to declare that a broad reduction in market liquidity has occurred.” Perhaps he should speak to actual market participants to get a true sense of what has happened to broad market liquidity.
He adds that there is no “convincing evidence” that liquidity has declined in equity, UST, corporate bond markets and adds that transaction costs seem to suggest liquidity has improved; however, measures of aggregate costs in corporate bond market may underestimate embedded liquidity costs.
Fischer says that because trading volume is high, it shows no obvious signs of liquidity problem. Nonetheless, thre is the potential for liquidity to evaporate in times of stress “deserves careful scrutiny,” along with broader risks to financial stability. While the potential for fire sales in bond markets is one area of concern, leverage at largest intermediaries is lower than before crisis due to recent regulation and supervisory changes; vulnerabilities from potential fire sale risks “are less significant.”
Fischer notes that it is possible that regulations have altered business model of dealer firms and liquidity; however, regulatory changes likely have enhanced financial stability and appear to be having positive effect, and believes that benefits may outweigh potential costs of possible reduction in liquidity.
Finally, he admits that flash events may be more frequent; which essentially disproves everything else he said.
His full speech can be found here.
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