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.

These improvements, along with sound fiscal policy, have increased trust in the Estonian economy and, furthermore, made it more resilient to economic shocks than before the crisis. Turning to some other indicators, the output level in our manufacturing sector already exceeded pre-crisis levels in 2011. Our exports are now at record levels. Compared to the third quarter of 2009, they have grown by 67%. Investments have also rebounded, becoming the fastest growing component of domestic demand. Over the last two years, our GDP has grown robustly and somewhat faster than we had expected, by around 8% in 2011 and about 3.2% last year. This is lower than the rates we would like to see in more normal times, and slower than the rate which Latvia achieved last year, but still a very respectable outcome given the state of the world economy. By now, we have recovered to about 95% of our somewhat unsustainable pre-crisis level. As a result, our unemployment rate has fallen steadily, most recently to 9.3%, which is lower than the euro area average. Our employment has risen to about the same level as it was in the middle of the boom period. Clear positive impacts are also evident in the financial sector. Joining the euro area removed any remaining risk of devaluation, working to lower interest premia, which are now near Nordic levels. Access to eurosystem liquidity support has decreased the risk of sharp interest rate fluctuations and sudden stops in capital inflows.