of cash–like or easily saleable assets. Empirical evidence points towards widening price differentials, during periods of liquidity shortage, among assets that are otherwise alike, but differ in terms of their asset market liquidity. For instance, there are often large liquidity premia (in some cases as much as 10–15%) in Treasury bond prices. An example of a flight to liquidity occurred during the 1998 Russian financial crisis, when the price of Treasury bonds sharply rose relative to less liquid debt instruments. This resulted in widening of credit spreads and major losses at Long-Term Capital Management and many other hedge funds. Role for policy There exists scope for government policy to alleviate a liquidity crunch, by absorbing less liquid assets and in turn providing the private sector with more liquid government – backed assets, through the following channels: Pre-emptive or ex-ante policy: Imposition of minimum equity-to-capital requirements or ceilings on debt-to-equity ratio on financial institutions other than commercial banks would lead to more resilient balance sheets. In the context of the Diamond–Dybvig model, an example of a demand deposit contract that mitigates banks' vulnerability to bank runs, while allowing them to be providers of liquidity and optimal risk sharing, is one that entails suspension of convertibility when there are too many withdrawals. For instance, consider a contract which is identical to the pure demand deposit contract, except that it states that a depositor will not receive anything on a given date if he attempts to prematurely withdraw, after a certain fraction of the bank's total deposits have been withdrawn. Such a contract has a unique Nash equilibrium which is stable and achieves optimal risk sharing. Expost policy intervention: Some experts suggest that the central bank should provide downside insurance in the event of a liquidity crisis. This could take the form of direct provision of insurance to asset-holders against losses or a commitment to purchasing assets in the event that the asset price falls below a threshold. Such 'asset purchases' will help drive up the demand and consequently the price of the asset in question, thereby easing the liquidity shortage faced by borrowers. Alternatively, the government could provide 'deposit insurance', where it guarantees that a promised return will be paid to all those who withdraw. In the framework of the Diamond–Dybvig model, demand deposit contracts with government deposit insurance help achieve the optimal equilibrium if the government imposes an optimal tax to