Financial Crises and Liquidity

In financial crises, central banks need to provide liquidity to stabilize markets, as risks may trade at premiums (money rates) to a bank’s target rates. Central bankers then need to infuse liquidity to the banks that trade and control rates. These are known as repo rates, and these are traded via IMM.

Repo markets allow the participating banks to offer rapid refinancing in the interbank market that is independent of any credit limits to smoothen the market.

A borrower has to pledge for securitized assets, such as equity, in exchange for cash to allow its operations to continue.

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