But the pricing of liquidity risk was either non-existent or inadequate in fully incorporating the maturity and currency mismatch, contingent and market liquidity risks embedded in the various banking business lines. 36. But liquidity is not only a matter of individual firm’s supervision; it is also of huge importance for the functioning of a whole system, which mainly relies on the liquidity management of a few firms. It is because of inaccurate liquidity risk pricing methodologies that large financial firms have built critical cash flow mismatches, and held substantial holdings of illiquid instruments with overestimated profitability profiles, based on unsustainable leverage strategy. 37. The Basel Committee’s renewed attention to liquidity issues is very topical. A major innovation of the proposed reform package deals with liquidity. In principle, no one will challenge the need to implement liquidity regulation for banks. Indeed, the new regulation will be calibrated and designed to help raise banks’ awareness of the cost of liquidity. Conclusion 38. In the past, financial crises have always triggered important changes in the organization and practice of Central Banking. The latest one is for me not an exception. Central banks have managed to adjust and confront several new, unprecedented challenges rather effectively and, it should be noted, with unprecedented degree of coordination and cooperation. 39. In many countries, the need to develop stronger macro-prudential policies has resulted in new assignments. As for my home county, I can say that having both monetary policy and financial stability responsibilities under the same roof has proved rather useful. 40.

Following the intensification of the financial crisis in Autumn 2008 – and against the background of rapidly receding inflationary pressures – we have taken monetary policy measures that are unprecedented in terms of nature, scope and magnitude. These measures fall into two categories: first, standard measures in the form of interest rate changes (Since October 2008, our key policy rate has been cut from 4.25% to 1%); second, what is known as “non-standard” measures, encompassing a policy of fully accommodating banks’ liquidity needs, enlarging the list of eligible assets, lengthening maturities for refinancing operations, the provisioning of liquidity in foreign currencies but also the purchasing of covered bonds and, more recently, government bonds. 8. Let me add that we never ruled out to implement asset purchases, when it appeared necessary to repair dysfunctional markets to ensure a proper transmission of monetary policy impulses. Indeed, in 2009, the ECB embarked into a program of covered bonds purchases, which is now completed. Although modest in size (60 bn euros), this program has been fairly successful in reviving a market segment which in turn supported bank funding at a time where bond issuance were secure. 9. The recent decision to purchase Government securities should be seen in the same light. The objective of this program is to address the malfunctioning of securities markets to restore an appropriate monetary policy transmission mechanism. These interventions are sterilized as liquidity injected is exactly drained, thus fully neutralizing the effect on the banking system. 10.