In this process, Spain has become a sort of case study. In fact, the underlying fundamentals of the Spanish economy were not as solid as they seemed: product and labour markets suffered from structural rigidities and the expansionary cycle was underpinned by an intense increase in credit and an overexpansion in housing, even taking into account the increasing demand generated by immigration and tourism. Between 1999 and 2007, the weight of housing investment in Spanish GDP doubled to above 12%, one of the highest on record among advanced economies. To a significant extent the financing of this housing boom came from core European countries, intermediated by their financial institutions, and resulted in a rapidly increasing external indebtedness of our private sector. BIS central bankers’ speeches  1  The corresponding widening current account deficit was not only a signal of robust internal demand; it also reflected a gradual, but substantial, loss of competitiveness. The large increase in employment – 5,5 millions between 1999 and 2007 (a 37% increase) many of them immigrants – generated in the construction and other labour intensive sectors, interacted with the dysfunctions of the labour market, leading to very low productivity gains and increases in relative labour costs, also in the more competitive sectors of our economy. Additionally, the housing boom and the economic expansion gave rise to an extraordinary increase in public revenues, providing for a significant increase in government expenditure.

Collectively, these developments have limited the dispersion of money market rates during the COVID-19 pandemic period and thus provided tangible support for a smooth functioning of short-term money markets in the euro area. https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp201123~8d9573b1b1.en.html  4/7  24/11/2020  Shifting tides in euro area money markets: from the global financial crisis to the COVID-19 pandemic  Regulatory changes The regulatory environment has become another important determinant of money market functioning in recent years. The banking sector reforms introduced after the global financial crisis were crucial for enabling the banking sector to play a supporting role in the pandemic crisis. But the Basel III regulatory reforms also imposed new requirements for banks, which had a bearing on their balance sheet capacity. In turn, these regulatory amendments likely affected market functioning because banks act as key intermediaries in money markets. Since 2015, when the leverage ratio and the liquidity coverage ratio (LCR) regulations were phased in, the dispersion index started to spike regularly at quarter-ends (Slide 8). These spikes coincided with banks’ leverage ratio reporting dates. Research suggests that banks whose leverage ratio is close to the regulatory minimum scale down their balance sheet at quarter-ends by reducing money market borrowing. This “window-dressing” behaviour has a market-wide impact: money market rates decrease and rate dispersion increases at quarter-ends. [27] Focusing on the regulatory environment in the aftermath of the global financial crisis, the conference paper by Correa, Du and Liao (2020) investigates how U.S. global systemically important banks supply dollar liquidity in repo and foreign exchange swap markets.