As a further key element, the European Commission recently released a proposal for a bank recovery and resolution directive, which contains important crisis prevention, early intervention, and resolution tools. Again, this toolkit serves to avoid tax-payer financed bank-rescue operations and to harmonise practices across countries. A fully-integrated financial framework, as also envisaged under the current reform agenda, would move beyond these common tools by establishing a common resolution framework, including a resolution authority at euro area level. This would further strengthen harmonisation and stringency in line with the “philosophy” underlying the bank recovery and resolution directive. Finally, the current reform efforts envisage the harmonisation of deposit guarantee schemes with a view to establishing a level playing field across countries and ensuring appropriate contributions from the banking sector to the financing of such scheme. To sum up, the on-going and envisaged reforms towards a financial market union follow a clear and economically sound strategy. It is crucial to follow through with these efforts in a swift and diligent manner. Conclusion Let me conclude. The banking sector is experiencing a necessary correction to overcome past excesses and to restore its health. The ECB’s non-standard measures have prevented destructive self-sustained dynamics. They have also helped to address heterogeneity in the transmission mechanism of monetary policy across different euro area countries. And most importantly they have contributed to ensuring price stability. Going forward, a more integrated financial market union is one of the top priorities in Europe.

In a nutshell, during this first phase of the crisis, the Eurosystem (1) more flexibly used its open market operations by changing the time-path of liquidity provision and employing fine-tuning operations, (2) lengthened the maturity structure of its open market operations (for instance, operations with a maturity of six months were introduced, whereas the maximum length had been three months before the crisis), and (3) coordinated with other central banks around the world to provide US Dollar funding.4 The failure of Lehman Brothers in September 2008 and the subsequent very severe financial market tensions led the Eurosystem to adopt further measures. Official interest rates were cut by 325 basis points in just a few months to the then-historically low level of 1 per cent by March 2009. Open market operations were conducted as tenders with a fixed rate and full allotment. This implied that the ECB no longer controlled the aggregate supply of liquidity to the banking sector, but that the aggregate demand by banks, subject to individual banks’ availability of adequate collateral, determined total liquidity provision. As a consequence, the Eurosystem’s balance sheet increased, and short-term money market interest rates dropped to levels close to the deposit facility rate. Moreover, the ECB further widened the set of eligible collateral. Finally, and importantly, the ECB introduced a limited number of open market operations with maturities of one year (three such operations were conducted in 2009). The objectives behind this second wave of measures differed from the first wave.