reserve holdings. Normally, central bank balance sheet expansion will enhance the net future availability of liquidity to the … system. However, in episodes of stress when a large fraction of claims on liquidity are exercised, the demand for liquidity … may hoard reserves to bolster their own prospects, contributing significantly to liquidity shortages. Therefore, because …

in 2017, there was no commensurate shrinkage of these claims on liquidity. Consequently, the financial sector was left … more sensitive to potential liquidity shocks, with weaker-capitalized banks most exposed. This necessitated Fed liquidity … provision in September 2019 and again in March 2020. Liquidity-risk-exposed banks suffered the most drawdowns and the largest …