The Global Risks Alliance (GRA)
Markets need buyers and sellers willing to trade at reasonable prices, and firms need funding they can roll. In stress, both kinds of liquidity can vanish together: dealers pull back, margins rise, and investors sell what they can. This page sets out how liquidity stress develops in core markets such as government bonds and repo, how it is measured, and which central banks, regulators and boards decide.
GRA · In development · service level R0
Liquidity and market stress is the drying up of the ability to trade assets and to roll funding at the same time. It develops through spirals between funding and market liquidity, limited dealer capacity and procyclical margins. Central banks, market regulators, CCP risk committees and treasurers hold the decisions.
How a failure at one financial centre can spread through settlement links. Design links, not real dependencies.
The working screen behind this subject: its structure, terms and states. Names are placeholders and values illustrative.
Liquidity and market stress · Financial system · Committee meeting 3
percentile vs history, 0 to 100
red: most connected node
Funding shortages and correlated behavior. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
When funding gets harder, intermediaries cut positions, which reduces market liquidity, which raises margins and haircuts, which tightens funding further.
Dealers' balance sheets and risk limits cap how much they can absorb. When everyone sells the same safe assets for cash, intermediation capacity runs out.
Margin models that respond sharply to volatility raise calls when liquidity is scarcest. Calls force sales, which raise volatility again.
In core market dysfunction, central banks may buy assets or lend against them. Their facilities restore functioning and raise questions about moral hazard and exit.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Market liquidity | The ease of trading an asset quickly in size without moving its price. |
| Funding liquidity | The ability of an institution to raise cash or roll its borrowing when needed. |
| Haircut | The discount applied to collateral value when borrowing against it, which rises in stress. |
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Government bond bid-ask spreads | basis points | daily | Market data | OBSERVED |
| Market depth | currency volume at best quotes | daily | Market data | OBSERVED |
| Repo rate spreads to policy rate | basis points | daily | Central bank and market data | OBSERVED |
| Initial margin requirements at central counterparties | currency | quarterly | CCP public quantitative disclosures | OFFICIAL |
| Liquidity coverage ratio | percent | monthly or quarterly | Bank Pillar 3 disclosures | OFFICIAL |
| Central bank liquidity facility use | currency outstanding | weekly | Central bank balance sheets | OFFICIAL |
The topic as a computational graph: named sources feed the methods, an evidence review gates the outputs, and the decisions stay with the authorities that hold them.
Fig. 02Nodes carry their type, two metric rows and a state; connectors show what feeds what; dashed frames name the owners; the timeline is the cadence. Design of the pipeline, not a record of a run.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| Federal Reserve H.4.1 and facility data | Central bank balance sheet and facility use | Public domain |
| CCP public quantitative disclosures under CPMI-IOSCO standards | Margin, default fund and liquidity data | Public, terms per CCP |
| BIS Quarterly Review | Analysis of market functioning episodes | Free, BIS terms |
| Bank Pillar 3 disclosures | Liquidity and funding ratios | Public records, terms per bank |
| FSB report on liquidity preparedness for margin and collateral calls | Policy recommendations for nonbank liquidity preparedness | Free, FSB terms |
Financial Stability prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Central banks | Whether and how to provide liquidity in market dysfunction | Market functioning indicators and facility records |
| Market regulators | Whether market structure changes, such as central clearing, are needed | Liquidity measures and episode analyses |
| CCP risk committees | How margin models respond to volatility | Margin data and procyclicality analyses |
| Treasury and liquidity managers | What liquidity buffers and contingency plans to hold | Stress episode evidence and regulatory ratios |
How uncertainty, losses and risk limits cause market makers and lenders to withdraw.
How tighter funding forces selling and selling tightens funding.
Where intermediation capacity is thin relative to the size of potential flows.
How margin calls in volatile markets drain liquidity.
Liquidity spirals link funding and markets. When asset prices fall, collateral values drop and margins rise, forcing leveraged holders to sell, which lowers prices further and tightens funding again.
Correlated behaviour is the core problem. Many participants use similar risk models, limits and strategies, so they want to sell the same assets at the same time.
Intermediation capacity matters. Dealers hold inventories and make markets, but their balance sheets are finite. In large sell-offs, they may step back, widening spreads and deepening price moves.
Electronic and automated trading provides liquidity in normal times but can withdraw quickly, contributing to sudden, short-lived dislocations. Liquidity that looks deep on screens may not be there when it is most needed.
Central banks act as lenders and sometimes market makers of last resort. Expectations of intervention can stabilize markets and can also encourage risk-taking.
| Method or data | What it shows | Its limit |
|---|---|---|
| Market microstructure data | Spreads, depth and price impact | High-frequency data is large and complex |
| Funding market data | Repo rates and volumes | Partial coverage |
| Episode studies | Behaviour in past stress events | Each episode differs |
| Agent-based models | Interaction of strategies | Sensitive to behavioural rules |
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.