However, it may be worth recalling that this is not the way banks have historically done business. Under the traditional – perhaps, I should say secular – “originate to hold” business model, banks extend loans to firms and households and hold them in their balance sheets until they mature or are paid off. Banks finance the provision of loans mainly by collecting deposits or issuing debt that have typically shorter maturities. Thus, banks intrinsically face a maturity mismatch in their balance sheets that exposes them to funding liquidity risks, i.e. 4 possible difficulties in funding their business activities. By allowing banks to transform their illiquid assets into marketable securities and providing an additional source of funding to expand lending, securitisation provides an effective mechanism to mitigate such risks and reduces the role in liquidity transformation traditionally performed by depository banks, with potential implications also for the monetary policy 5 transmission mechanism. An additional attraction is that, by securitising their loans, banks have often in the past economised on costly capital requirements. In fact, it has been argued that, under the Basel I accord, regulatory capital arbitrage has been one of the main reasons why banks have adopted the “originate to distribute” model. Finally, it should be noted that securitisation can also be a source of fees and income for banks with expertise in the structuring of assetbacked securities. Also from the point of view of the economy as a whole, the “originate to distribute” model can potentially yield a number of benefits.

In particular, thanks to the built in flexibility of its collateral framework, the Eurosystem has been able to step in effectively when intermediation in interbank markets deteriorated, without the need to make changes to its framework. As a side effect of the broad range of assets accepted as collateral, the framework helped us also during the turmoil to address liquidity squeezes in some markets, including the ABS market, as it mitigated refinancing risks for asset classes that had become illiquid. This has contributed to financial stability in the euro area. Other central banks may have had those effects in mind when they initiated changes to their operational framework in the wake of the turmoil, leading to a significant degree of convergence among the various frameworks. Of course, the ability of the Eurosystem’s operational framework to respond to the challenges for monetary policy implementation posed by the recent period of financial market volatility does not mean that there is no scope for further improvements and refinements. For instance, the eligibility criteria for marketable debt instruments have been kept general in order to ensure that the collateral framework of the Eurosystem is responsive to financial innovation. There is therefore a concomitant need for the Eurosystem to refine its collateral policy, including the risk control measures, and ensure that the collateral continues to meet the Eurosystem’s risk tolerance level and allows the effective implementation of monetary policy. This has already been done in the past from time to time, with a view to further enhance the collateral framework.