Bank for International Settlements analyses how central bank liquidity and bank credit lines provide monetary system elasticity during shocks

The Bank for International Settlements published a BIS Bulletin on “elasticity” in the monetary system, arguing that the two-tier structure of central bank money and commercial bank money enables the supply of liquidity to expand and contract with demand, helping obligations clear without payment gridlock in both normal times and stress. It contrasts this with pre-funded payment instruments, which do not offer the same capacity to create liquidity on demand, and links effective elasticity to the presence of regulatory safeguards. The Bulletin highlights central bank mechanisms such as intraday overdrafts in real-time gross settlement systems and lender-of-last-resort facilities against good collateral, alongside commercial bank lending, overdrafts and committed credit lines that allow firms and households to draw funds when needed. During the first quarter of 2020, US bank credit rose by around USD 0.5 trillion, with unused commitments falling by around USD 0.25 trillion, suggesting roughly half of the increase reflected firms drawing on pre-existing credit lines; at the onset of the pandemic, undrawn credit lines were estimated at about 120% of annual debt servicing costs and more than twice firms’ cash buffers. In the context of rising trade policy uncertainty following the US presidential election in November 2024, the Bulletin reports a surge in corporate credit line availability, with the average undrawn credit doubling in the fourth quarter of 2024, and finds that firms in sectors affected by the 2018 US Section 301 tariffs increased their undrawn-to-total credit ratios by around 20% in the United States, with a similar pattern outside the United States driven by expanded commitments rather than reduced outstanding credit.