Nor can it take too long as this would risk creating incentives to return to the unsatisfactory behaviour exhibited prior to the crisis. Defining the transition phases is possibly the most difficult challenge. The transition is characterised not only by the lag between decisions relating to new prudential regulations and their application, of which I spoke earlier, but also by the extraordinary measures in terms of monetary and financial policy, adopted by governments and central banks to combat the recession and support the financial system in facing the systemic crisis. 17  In fact, recent studies have shown that securitisation and credit derivatives tend to increase the supply of bank loans; see, for instance, Estrella, “Securitisation and the efficacy of monetary policy”, Economic Policy Review, vol. 8(1), Federal Reserve Bank of New York, 2002; Hirtle, “Credit derivatives and bank credit supply”, Federal Reserve Bank of New York Staff Report, n. 276, 2007; Y. Altunbas, L. Gambacorta, D. Marques-Ibanez, “Securitisation and the bank lending channel”, European Economic Review, Vol. 53, Issue 8, 2009. The major central banks have promptly and forcefully responded to the crisis with a broad variety of measures. The classical prescription by Walter Bagehot, which describes central banks as lenders of last resort, has proven to be as valid today as it was 137 years ago when “Lombard Street” was first published. 18 Accommodating the sudden increase in the demand for liquidity prevented a disorderly de-leveraging process, prevented illiquid but solvent banks from going bust, and, more broadly, sustained confidence in the economy.

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.