The bank can count on being able to invest any surplus remaining at the end of the period in the market at a rate close to the policy rate. It is possible that the formulation of minimum reserve requirements can affect the need to stabilise the overnight rate in periods of financial turmoil. As it does not normally entail any additional cost, there may be an incentive for the banks to increase their deposits with the  BIS Review 51/2008  5  central bank at the beginning of the minimum reserve period when there is great uncertainty in the interbank market. This can entail a reduction in supply and thus rising interest rates in the interbank market. Recent developments Since last summer, developments in the financial markets have been turbulent. The problems were triggered in the US subprime market, which caters to borrowers with low credit ratings. The problems actually began back in 2005 when rising interest rates affected many borrowers. When loans were renewed at new, higher interest rates the loan costs for these borrowers rose substantially. And when property prices fell, there was no scope to mortgage the house so householders could borrow their way out of their problems. Many borrowers could no longer make the interest and mortgage payments on their loans. This caused major loan losses for many mortgage institutions and a general unease among investors. The loans had moreover been repackaged into what are known as structured products and sold on to investors around the world.

Population ageing, by increasing the relative supply of savings, explains most of the fall across several advanced economies. A low or even negative natural interest rate poses new challenges for stabilisation policies. The lower bound on the nominal policy interest rate may more frequently be binding, and not just in episodes of acute crisis. This leads to the conclusion 3/5  that non-conventional monetary measures may ultimately be used more frequently than originally expected. In addition, many emerging economies face the gradual tightening of global financial conditions in a context of slowdown in their economic activity. In particular, this context is especially challenging for the economies that receive capital flows. In these cases, economic authorities must foster a stable macroeconomic environment and sound institutions that attract permanent capital flows. The widespread scant room for manoeuvre for the traditional stabilisation tools we have witnessed calls for the development of other policies to relieve monetary policy of the excessive role it has played post-crisis in maintaining financial stability. One of the lessons of the crisis is the importance of including new instruments in the policy toolkit, namely macroprudential policy. Therefore, it is essential to identify risks and vulnerabilities to the economy that may stem from the financial system affecting the real economy or vice versa. In any event, it is of paramount importance to develop the appropriate macroprudential instruments covering both bank and non-bank financial intermediation to tackle these risks in order to have a stable financial system with countercyclical buffers that support sustained economic growth.