Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

I’m not sure that this is helpful, but maybe I can give a slightly different example from another perspective. We have a bunch of U.S. affiliates of some of the weakest European institutions that have faced very substantial dollar funding needs and have come to us and asked for substantial ongoing access to liquidity. When they have a substantial amount of lendable collateral, collateral with substantial market value relative to the needs, we have been comfortable meeting those needs. When their needs have substantially exceeded or might potentially exceed the market value of their eligible collateral, then we have talked to the home central bank. We have said that, in effect, if you want us to be able to meet those needs and they have collateral in your market that is substantial relative to those needs, then the better way for us to do this is for the home country central bank to meet their dollar liquidity needs against the collateral there or meet the liquidity needs and we provide the dollar’s worth of guarantees from the central bank.

So this home–host thing is a delicate balance, and as Nathan said, it shouldn’t all fall on the host central bank. The best thing possible is for the home country central bank to take most of the responsibility for meeting the liquidity needs and for us to help them facilitate that where necessary. But when those needs exceed what we would normally give in terms of access, then you have to have a conversation with the foreign central bank. So, for example, if a weak U.S. institution in Mexico faces substantial needs in Mexico well in excess of their eligible collateral in Mexico, I suspect they would call us and say, “We want you to meet those needs.” We would have to consider at that point where they are in the liquidity-solvency spectrum and how comfortable we are in meeting those needs.

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