Looking at the short to medium end of the risk-free curve in more detail, our measures (including the pandemic emergency purchase programme, or PEPP) have contributed to a lowering of the medium and long segments of the yield curve compared to the pre-crisis path (Chart 7). Chart 7 EONIA forward curve estimated from overnight index swaps  https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200519~e5203d3520.en.html  5/14  5/19/2020  Pandemic central banking: the monetary stance, market stabilisation and liquidity  (percentages per annum)  Sources: Bloomberg, Refinitiv and ECB calculations. Note: The latest observations are for 14 May 2020 (for realised EONIA). At the long end of the curve, the combined effect of our asset purchase programmes – comprising the asset purchase programme (APP) and the PEPP – is estimated to compress the term premium significantly by around 80 basis points at the ten-year tenor. Looking just at the decisions we have taken since March, the additional € billion APP purchase envelope for 2020 and the PEPP contribute to a further easing of ten-year rates by lowering the term premium by more than 10 basis points. The total effect of these decisions on longer-term interest rates is likely to be even more substantial, given that the PEPP not only works through the well-known channels of duration extraction and portfolio rebalancing, but also addresses risks to transmission in the euro area. To the extent that this lowers risk premia, interest rates in the euro area have declined even more strongly as a result of our decisions compared with plausible counterfactual scenarios.

Nevertheless, the majority of transactions are between banks and not between banks and insurance companies. In terms of financial stability, there are both advantages and disadvantages to these new instruments. Among other things, they allow the transfer of risk to market participants that are willing to bear it. Such participants are often specialised and well equipped to bear the risk. If the credit risk is spread to market participants outside the banking sector, banks’ risk exposure is reduced. Disadvantages arise if there is a concentration rather than a diversification of risk on the buyer side. If individual market participants take on too much risk, their counterparties (such as banks) may be exposed to losses. There is always a risk that buyers lack sufficient knowledge of new products. Another problem has been that the new markets’ infrastructure has not kept pace with turnover so that operational risk in the system has increased. Risk management implies that investors take into account how risk and return are correlated for different investments. Normally, such assessments are based on correlations under normal circumstances, and the challenge lies in dealing with a completely different correlation during a crisis. New instruments can make such risk management more demanding. There may be poor liquidity in these markets and this can increase price fluctuations during a crisis and spread turbulence from one market to another. In general, the new instruments for risk management and diversification have probably contributed to stronger and more stable economic growth. As a result, economies have become more efficient.