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.

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