Assessing Systemic Liquidity Infrastructure
Systemic liquidity infrastructure refers to a set of institutional and operational arrangements—including key features of central bank operations and of money and securities markets—that have a first-order effect on market liquidity and on the efficiency and effectiveness of liquidity management by financial firms (see Dziobek, Hobbs, and Marston 2000). Key features of financial market infrastructure and financial policy operations that affect liquidity management include the following:
• Design and operation of payment systems and securities settlement systems
• Design of monetary policy instruments and procedures for money and exchange markets operations
• Public debt and foreign exchange reserves management strategies and operations.
• Microstructure of money, exchange, and securities markets
Those infrastructure elements are important for the effective implementation of monetary and fiscal policy, but their effect on the efficient functioning of financial markets, the soundness of financial institutions, and the broader systemic stability is a key focus of assessing systemic liquidity infrastructure. Another equally important consideration is to examine the extent to which limitations on the availability of infrastructure pose a constraint on the development of money and securities markets and on sound and profitable operations of financial institutions. The remainder of this chapter highlights the key issues to consider in assessing the above-listed infrastructure elements.