Just announcing a financial safety net makes banks start taking huge risks before they even get a dime.
March 19, 2026
Original Paper
Liquidity Backstops and Risk Taking in Market Based Finance
SSRN · 6395879
The Takeaway
When a new central bank facility for non-banks was announced in 2025, investment funds immediately dumped safe assets for riskier ones and increased their portfolio maturities despite no change in their actual cash flow. This proves that the mere 'expectation' of a backstop creates instant moral hazard, destabilizing the market before the safety net is even operational.
From the abstract
Central bank liquidity backstops alter the incentives of money market funds (MMFs) by affecting the expected costs of liquidity management and redemption pressure. The Contingent Nonbank Repo Facility (CNRF), introduced in early 2025, was designed as a targeted liquidity support mechanism for nonbank financial institutions (NBFIs). Using high-frequency portfolio data, we show that Sterling-denominated MMFs rebalanced sharply toward riskier private assets following the facility's announcement-des