IMF's Capital Markets Head Says Central Banks May Have to Be "Market Makers"

From Reuters:

(Adds reaction from Hong Kong regulator, background)
Central banks may need to become "market makers of last resort" if there is not enough

liquidity during volatile sell-offs, a senior International Monetary Fund official said on Thursday.
Regulators worry that when interest rates begin rising from their prolonged low levels there will be a stampede for the exits by bond investors and that markets won't have the liquidity or capacity to deal with it smoothly.

The prospect that the Federal Reserve may start raising rates later this year has already prompted "taper tantrums" or severe volatility in global financial markets.

Jose Vinals, director of the IMF's capital markets department, said market liquidity has shrunk as capital requirements on banks have increased but that there was no simple relationship between the two. 

Central banks buying bonds to conduct unprecedented stimulus programmes over the last three years -- most recently the European Central Bank -- have also been blamed for sucking volume out of the market, making it less liquid.

Vinals said it was unclear whether markets were simply more volatile or whether there were systemic consequences, but it would take time to find a solution,

"The time it takes for the global regulatory community and central banking world to find a solution this time may be longer than the time where one episode of big illiquidity happens," Vinals told a meeting of the International Organization of Securities Commission (IOSCO) in London....MORE