The steps taken by central banks have taken them into, up to now, uncharted territory. Interest rates have been reduced to very low levels by historical standards, clearing the way for significantly lower bank interest rates (although with a significant time-lag), thus supporting credit demand from households and firms. At the same time, non-conventional measures have been adopted with the aim of bringing abnormally high money market spreads down and ensuring a proper transmission of the monetary policy impulse. These exceptional measures have had important effects on macroeconomic and financial stability, and improved the overall conditions on financial markets. 19 In particular, they have helped to “liquefy” assets that could otherwise have caused the insolvency of many financial institutions. More generally, they have helped to restore confidence by reducing uncertainty. In addition, they have prevented contagion effects that can arise in the financial system as a result of the inter-connectedness between various market participants. The monetary policy intervention also helped to restore the profitability of banks as the fall in short-term interest rates steepened the yield curve, to the benefit of the banking system, which usually funds itself in the short term in order to provide credit for longer terms. This profitability also helped to support the flow of credit to the economy. Financial measures have also been adopted, such as increased deposit insurance, guarantees for bank liabilities, and injections of capital. In addition, fiscal budgets have supported aggregate demand via automatic stabilisers and expansionary measures.

Rajan, “Has financial development made the world riskier?”, National Bureau of Economic Research Working Paper Series, No 11728, 2005; G. Jiménez, S. Ongena, J.-L. Peydro and J. Saurina, “Hazardous times for monetary policy: what do 23 million loans say about the impact of monetary policy on credit risk?”, CEPR Discussion Paper, No 6514, 2007; V. Ioannidou, S. Ongena and J.-L. Peydro, “Monetary policy, risk-taking and pricing: evidence from a quasi-natural experiment”, NBER Summer Institute, 2009; A. Maddaloni and J.-L. Peydro, “Bank risk-taking, securitisation, supervision and low interest rates: evidence from lending standards”, ECB Working Paper Series, forthcoming. 32  BIS Review 10/2010  process. I will obviously not go into all of them, given the extent of the work in progress, but I will mention a few initiatives. First of all, the regulation of the banking system must be reviewed, with new rules constraining its assets and balance sheet structure. In December 2009, the Basel Committee on Banking Supervision announced a reform package aiming to strengthen global capital and liquidity regulations. Capital requirements will be more stringent, thanks to the improved quality, consistency and transparency of the regulatory capital base. Proposals include a counter-cyclical capital buffer, and measures to promote provisioning over the cycle and to mitigate the possible excess cyclicality arising from the minimum capital requirements. 12 Measures concerning the role of external ratings and the treatment of securitisation have also been announced. Better risk coverage is also needed, which is capable of capturing major on and off-balance sheet risks and derivative-related exposures.