A key determinant of the credit crunch was a shortage of liquidity and a breakdown of the interbank lending market. In an attempt to ease the credit situation and restart the interbank lending market, the Bank of England auctioned over £40bn of credit at the end of September. The aim of this was to boost the liquidity position of the banks.
|1.||Explain why the Bank of England needed to boost liquidity in the money markets.|
|2.||Using diagrams as appropriate, show the impact of this increase in credit on the money markets. What constraints does the Bank of England face in ensuring that it achieves the desired outcome?|
|3.||Discuss whether the approach of raising liquidity is likely to be more or less effective than a change in the regulatory framework.|