Sirio AramonteAfter the Global Financial Crisis, the liquidity-supply ecosystem that underpins nonbank intermediation shifted away from traditional dealers. Instead, it started to rely more on intermediaries with fragile funding structures and opportunistic investment strategies. Over the years, stress episodes saw the sudden retrenchment of these intermediaries, which amplified liquidity imbalances and market malfunction. Efforts to reduce the risk and magnitude of liquidity imbalances have mostly focused on reducing liquidity transformation and on constraining liquidity demand. This paper highlights the importance of strengthening liquidity supply in certain non-bank segments, particularly those that allow households to conduct long-term consumption smoothing. The main argument is that the rise of non-bank intermediation, and the ensuing risk of spikes in liquidity demand, partly reflects structural changes in how households can meet fundamental financial needs. In addition, the risk-taking channel of monetary policy can affect liquidity-demand dynamics, including for some intermediaries that facilitate household consumption smoothing.
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