Did the Federal Reserve act as ‘lender of last resort’ during the worst of the crisis? This column contributes to the current debate on the appropriateness and effectiveness of non-standard measures that have been taken by the Fed. Quantitatively measuring the effect of the Term Auction Facility on participating banks’ liquidity risk, it seems that, because the Term Auction Facility programme provided banks with enough time to adjust exposures on their balance sheets, the Fed did act as ‘lender of last resort’.

How should financial regulators address problems stemming from liquidity risk? This column argues that the liquidity coverage and net funding ratios proposed for Basel III are economically and politically impractical. It recommends using those ratios as long-term targets while imposing ‘prudential risk surcharges’ on deviations from the targets.

Liquidity risk – which was at the heart of the September 2008 financial meltdown and explains regulatory concerns about a Greek default today – remains an open issue in financial regulatory reform. This column presents a consensus view of several leading academics on what more needs to be done to close this regulatory gap.

What is liquidity? Why is it at the heart of the crisis? How can we fix it? This column explains it all in terms any trained economist can understand.