The Fed's quarterly survey of senior officials involved in providing credit for securities, derivatives and other financial products found broad agreement that market liquidity had declined over the last five years - with a third of the respondents saying conditions had fallen off "considerably."

"Over four-fifths of respondents indicated that current liquidity and market functioning in secondary markets for nominal Treasury securities had deteriorated relative to the second quarter of 2010," the Fed survey found. Respondents cited the impact of new regulations and changes in banks' risk management strategies as having made them less willing to finance securities transactions or perform "market making" functions, according to the survey released on Wednesday.

The potential decline in market liquidity has emerged as a central discussion at the Fed and among investors, with some analysts and companies worried that the inability to quickly buy and sell large amounts of Treasury bonds at reasonable prices could lead to increased financial instability.

(Reporting by Howard Schneider; Editing by Andrea Ricci)