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OFR Financial Stability Monitor tracks drivers behind markets. We take a close look at Funding/Liquidity.

The Office of Financial Research (OFR) has just published their Financial Stability Monitor. It has a great graphical way, using heat maps, to see how markets drivers have changed over time. Their stats start in 2004:Q1 and go to 2015:Q1. We play with the graphs a bit.

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Why has liquidity decreased in the markets? Daniel Tarullo says he isn’t sure.

An interview last Thursday with Federal Reserve Board Governor Daniel Tarullo, discussing possible reasons for the October 15, 2014 Flash Crash in US Treasuries, shows regulatory uncertainty for why, at least anecdotally and at times pointedly, market liquidity has pulled back. Tarullo worked both sides of the regulatory fence in his comments, noting that regulations may have played a role but that also market makers may be acting no differently than they have in the past. What indeed is causing liquidity troubles? The answers aren’t that complicated; the trouble is that solutions may mean that regulators have to double back on their desires for less-risky banks.

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