Will asset managers dash for cash? A summary of the implications for central banks

Dealers in Canadian fixed-income markets tend to match their clients’ orders to buy or sell securities. However, when several asset managers need cash at the same time, market liquidity relies increasingly on dealers’ willingness to buy securities and hold them on their own balance sheets. When this happens, selling liquid securities to generate cash becomes costly for asset managers. Thus, asset managers may occasionally anticipate a potential limit in dealers’ capacity to hold securities and decide to sell securities as a precaution. In severe scenarios, this precautionary selling of securities can spread across market participants and lead to a dash for cash, overwhelming dealers’ balance sheet capacity, and warrant central bank interventions.

The onset of the COVID‑19 crisis is one example of when a dash for cash occurred in Canada. The net sales of Government of Canada (GoC) bonds to dealers by their clients increased to over $5 billion between March 9 and March 20, 2020. The cost of selling the bonds quadrupled (Chart 1). In our full staff discussion paper (Cimon et al. 2025), we argue that this sale of bonds to dealers was relatively small compared with its impact on market liquidity. We also point out that there were other indications in markets for bankers’ acceptances and GoC treasury bills that signalled dealers were approaching a limit in their willingness to buy securities. Financial market conditions started to normalize only after the Bank of Canada intervened to support Canadian financial markets.

The Contingent Term Repo Facility (CTRF) is the Bank’s existing facility for providing liquidity support to asset managers in periods of market-wide stress. In 2024, the Bank of Canada reviewed and updated its CTRF policy to incorporate lessons learned from the COVID‑19 pandemic. These changes, highlighted in Chen, Chu and Kinnear (2025), should increase asset managers’ readiness to draw on the facility in stress and further reduce the likelihood of precautionary asset sales. The updated CTRF:

• identifies high-quality securities that will be accepted
• clarifies eligibility criteria for asset managers
• enhances readiness through pre-approved counterparties and regular testing
• establishes a formal risk assessment and governance process

The review also explored three broad areas where policy-makers could take actions to reduce the risk of a dash for cash:

• strengthening the regulation of asset managers’ liquidity risk management practices
• reinforcing the resilience of the fixed-income market structure
• expanding the central banks’ tools

In our discussion paper, we focus on two broad ways to adapt the central bank tool kit to reduce the likelihood of a dash for cash. Central banks could:

• introduce standing facilities for asset managers to guarantee the degree of liquidity of existing bonds or assets under all market conditions
• create new assets that asset managers can always use to meet cash needs

The aim of each of these options would be to provide asset managers with access to cash that does not depend on dealer capacity. These potential new assets or facilities would help asset managers insure themselves against some of their liquidity risks. Equipped with a more resilient buffer of liquid securities, asset managers would have greater confidence that they could meet future uncertain cash needs. This could reduce the need for precautionary asset sales by asset managers. By reducing the probability of such precautionary asset sales, these facilities could also reduce the likelihood that a central bank faces market conditions that require broad, large and rapid asset purchases.

The evolution of the balance between the potential demand for liquidity from asset managers, on the one hand, and dealers’ ability to provide it, on the other, will determine whether enhancing the tool kit may eventually be necessary. Central banks have both the mandate and the tools to mitigate a dash for cash. However, despite their effectiveness, central bank interventions involve trade-offs that may become more significant if the likelihood of a dash for cash increases. When deciding to expand the tool kit, central banks should also assess unintended consequences, including potential:

• implications for the conduct of monetary policy
• market distortions due to a larger central bank footprint in the economy
• moral hazard for asset managers