LONDON, United Kingdom, Nov. 8, 2011 /CNW/ - Large, abrupt fluctuations in global liquidity are having a major impact
on global financial stability and economic growth, Bank of Canada
Governor Mark Carney said today in a speech to the Canada-United
Kingdom Chamber of Commerce. "Over the medium term, the continuation of
such extreme liquidity cycles could ultimately threaten open capital
markets and a free trading system if not better addressed," he warned.
Governor Carney described overall global liquidity conditions as the
result of complex interactions among several factors, including
macroeconomic policies (such as the monetary policy stance and exchange
rate regime), microprudential regulations (such as capital and
liquidity rules), financial market innovation and risk appetite.
Over the past five years, global liquidity has swung wildly from an
"exuberant surge" to a "severe retreat" to a renewed flow of liquidity
in response to massive monetary and fiscal policy stimulus, the
Governor said. "Now the cycle is again turning. The ongoing
deleveraging of the European banking system is reducing global
The volatility of global liquidity, its intense procyclicality, and its
impact on local and global economies all underscore the "value of the
structural and cyclical policies that can dampen these cycles and
channel the flows to their most productive uses," the Governor said.
The International Monetary Fund is playing an important role in the
peripheral country programs, which could be expanded through further
conventional, conditional lending, if required, Governor Carney said.
Central banks remain best placed to address future surges and shortages
in global liquidity. However, he stressed that "there is a premium on
improved oversight and regulations that reduce the procyclicality of
global liquidity and make the system more resilient."
Once it is fully implemented, the G-20's financial reform agenda will
dampen global private liquidity cycles, the Governor said. "Measures
that increase the resilience of financial institutions, such as the new
Basel III capital and liquidity standards, will reduce the probability
and frequency of a sudden liquidity shock. Measures that reduce the
procyclicality of the financial system will help stabilise global
SOURCE Bank of Canada
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