Insurance companies and pension funds, on the other hand, have limited capacity for credit risk, but more for market and liquidity risks.

Liquidity risk is best hedged through diversification across time.

For, even as the central banking authority administered the price of liquidity, the price of risk was left to the tender mercies of the market.

Critics might cite the moral hazard risk generated by liquidity support.

Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed.

First, central banks suspended the rules of the free market in liquidity squeezes.

All these non bank institutions are now potentially at risk of a liquidity run.

The breakdown was fundamentally a liquidity crisis, and liquidity was easily restored in several ways the New York banks issued their own liquidity through a clearing house one massively powerful financial institution, J.P. Morgan, bought up collapsing shares, and thus reversed a market panic and a scramble for liquidity and European central banks supplied gold to the American market.

Restoring financial market confidence has had to rely on liquidity injections by major central banks.

With so much internal liquidity, these businesses are not sensitive to reductions in market interest rates.

The fund's objectives, typically, are those of (a) maximizing risk adjusted returns, (b) security of capital and (c) liquidity, and their respective attitudes to risk.

So, central banks must set the price of liquidity in the market day in and day out.

At another level, a money market permits efficient transactions and liquidity management and otherwise enhances enterprise efficiency.

The proposal would also have required that money market funds hold back a fraction of some redemptions, thereby making investors take some risk that funds might not have complete transactional liquidity if their investments weakened.

But this is really a theory about risk management for certain kinds of products, not liquidity per se .

The emerging market economies are at risk as a result.

Traditionally, sovereign risk has been concentrated in emerging market economies.

Finally, liquidity risk should be properly assessed in risk management models, and both banks and other financial institutions should better price and manage such risk most financial crises are triggered by maturity mismatches.

But, while banks with short term funding and many branches originating loans have a deep capacity for holding credit risks, they have a limited capacity for holding market risks, and little capacity for holding liquidity risk.

And a philosophy that asserts that financial innovation, market completion, and increased market liquidity are always and axiomatically beneficial provides a clear basis for regulatory decentralization.

Today, Spain and Italy are at risk of losing market access.

Surprisingly, the bond market still seems almost oblivious to this risk.

Non EurepGAP compliant suppliers therefore even risk losing domestic market shares.

At the time, the United States did not have a central bank to inject liquidity back into the market.

Furthermore, ample worldwide liquidity and the rise of other commodity prices induced market speculators to buy into oil futures.

Call it information liquidity, akin to financial liquidity.

The ECB s task is to provide liquidity to banks, while the EFSF and ESM are designed to absorb solvency risk.

In a turbulent world of market volatility, however, they risk being overwhelmed.

Like banks, all these financial institutions are subject to liquidity or rollover risk the risk of going belly up if their creditors do not rollover their short term credit lines.

Instead, it relies on value at risk (VaR) measures that link risk to standard notions of short term market volatility.

Liquidity position

Money market funds perverse incentives to take on excessive risk remain largely intact.

Sharp rises in sovereign, corporate, and interbank liquidity spreads will increase the cost of capital, and increases in risk aversion, volatility, and sovereign risk will undermine business, investor, and consumer confidence further.

Moreover, taxation would increase costs (passed on to borrowers) and reduce the volume of transactions, thereby fueling market volatility amid decreasing liquidity.

The term awash with liquidity was also used often in 1999 and 2000, just before the major peak in the stock market.

Projects in this field include physical market development enhancement of market infrastructure facilitation of private sector initiatives and commodity price risk management.

Is Liquidity Enough?

The Liquidity Puzzle

Substantial bank liquidity.

3. Liquidity ratio

Liquidity position (consolidated)

Critics might cite the moral hazard risk generated by liquidity support. But a well designed framework that offers swap lines only to well qualified emerging economies and only temporarily would diminish this risk substantially.

On the contrary, the Peoples Bank of China (PBoC) and other relevant authorities should consider capital controls, market suspensions, and emergency liquidity provision.

The key question, however, remains whether China is defying market forces at its own risk.

This brings me to my third point we must reconceptualize the meaning of market risk.