Ensuring that credit can flow
The financial system works best when people, companies, governments and financial institutions such as banks have cash to operate on a daily basis—what’s known as liquidity.
In normal times, there is plenty of liquidity to go around.
But in a crisis, everyone wants cash, and few want to trade assets. They think it’s safer to just hold on to what they have and wait. This causes liquidity to dry up, making it harder for people, companies and governments to get the cash they need.
When the system can’t supply liquidity to those who need it and credit doesn’t flow, the effects of a big economic shock such as COVID-19 can be worse and the recovery can take longer.
The Bank used several different tools to improve:
- funding for banks, so they could continue lending to people and businesses
- liquidity and functioning in a range of core markets, by purchasing financial assets such as bonds in exchange for cash