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International Monetary Fund

Introduction 1. The COVID-19 pandemic has created severe disruption in the global financial system, with many emerging market and developing countries (EMDCs) facing liquidity shortages . In recent weeks, global financial conditions have tightened dramatically, with markets effectively frozen in some cases. This has created sizable demands for U.S. dollar liquidity. In response, the systemic reserve currency-issuing central banks have activated their bilateral swap network. The U.S. Federal Reserve has also extended bilateral swaps to several smaller

International Monetary Fund. Monetary and Capital Markets Department

In the current crisis, bank funding markets have struggled to provide liquidity across the banking sector and thus to act as a conduit for monetary policy in mature economies. This chapter examines the reasons for the recent difficulties in these markets and the effects on the interest rate channel of monetary policy transmission. It finds that elevated interbank spreads are not just the product of how interbank rates are calculated and that the recent pressures have been principally driven by concerns about bank distress risk, with U.S. dollar liquidity