In particular, the tensions in the commercial paper market also affected the term unsecured money market, not least because commercial paper rates are often used as a reference for the pricing of EURIBOR under the hybrid methodology. The Eurosystem reacted decisively to the tensions in financial markets that extended well beyond the money and commercial paper market. We launched additional liquidity-providing operations for banks against an expanded set of collateral via targeted longer-term refinancing operations (TLTROs) at highly favourable rates, longer-term refinancing operations (LTROs and PELTROs) as well as foreign currency liquidity arrangements (swap and repo lines). In addition, the Eurosystem sharply expanded its purchases of public and private sector assets, which also included purchases of commercial paper, under the Pandemic Emergency Purchase Programme (PEPP) and the Asset Purchase Programme (APP). [13] The Eurosystem’s policy interventions effectively eased the liquidity strains observed in the spring of 2020 and supported market functioning by ensuring ample liquidity support for banks and stopping selfreinforcing fire-sale dynamics in key financial market segments, such as investment and money market funds. [14] The interventions have had a sustained effect on money markets in the euro area. Both EURIBOR and commercial paper rates have continued to recede in recent months and are currently at historically low levels. [15] The yield curve in unsecured money markets has flattened substantially even compared to the pre-crisis period (right-hand side of Slide 5). These low money market rates support the Eurosystem’s highly accommodative monetary policy stance.

Central bank liquidity provision This brings me to the second factor, namely central bank liquidity provision, which influences the effective pass-through of monetary policy decisions to money market rates and financing conditions more broadly. The relation between excess liquidity and overnight money market rate dispersion has also changed since the global financial crisis. Prior to 2015, higher levels of excess liquidity tended to lower the dispersion of money market rates (Slide 6). After 2015, increases in dispersion also occurred in periods of ample and rising excess liquidity. https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp201123~8d9573b1b1.en.html  3/7  24/11/2020  Shifting tides in euro area money markets: from the global financial crisis to the COVID-19 pandemic  There are several reasons for this changing relationship. Prior to 2015, central bank liquidity provision and the associated Eurosystem balance sheet expansion were driven by the need to restore an impaired monetary policy transmission mechanism, caused by heightened market stress during the financial and sovereign debt crises. During the global financial crisis, when the unsecured interbank market came under stress, banks turned to the central bank to obtain liquidity. The Eurosystem essentially assumed the liquidity-providing role of the private market. During the sovereign debt crisis in the euro area, banks once again increased their demand for central bank liquidity. The provision of central bank liquidity also stimulated the supply of liquidity in the private market, especially to banks located in the periphery. [16] The optimal design of central bank liquidity policies is an important research question, which is examined in the conference paper by Robatto (2020).