And “effective” means that typical temporary movements in the demand or supply of reserves don’t cause large changes in the federal funds rate without active management of reserves. I’ll come back to the challenge of knowing what constitutes “ample” later. The second element consists of the interest rates that the Fed itself sets and that influence the federal funds rate. These “administered” rates, as they are known, include the interest rate paid to banks on their reserve balances and the overnight reverse repo rate that the Fed pays to a wider set of money market participants on a similar, risk-free overnight investment. These first two elements—an ample quantity of reserves and administered interest rates—are meant to do the lion’s share of work to keep the federal funds rate within the target range. But there may be relatively infrequent situations when these two elements are not enough to keep the federal funds rate within the target range. Therefore, the third element is the directive from the FOMC for the New York Fed’s Open Market Trading Desk (the Desk) to conduct open market operations as needed to keep the federal funds rate within the target range. For example, through repurchase agreements of Treasury and agency securities, the Fed can temporarily increase the amount of reserves in the system. To support the economy in the aftermath of the financial crisis, the FOMC increased its long-term securities holdings dramatically. This led to a similarly large increase in reserves, which peaked at about $ trillion in 2014.

Even though the analysis of the cumulative impact and the interactions between regulations is still in its early days, vigilance is required to ensure that the implementation of reforms does not result in a reduction of financial activities, such as market making that are vital for preserving market liquidity, financing investments and firms and ultimately the real economy. The foreseen banking structures reform and European Financial Transactions Tax (EFTT) are cases in point. In both projects, an appropriate approach should strike the right balance between limiting risks associated with trading activities and the need to preserve financial activities that are useful if not essential to the development of the real economy. Doing so would be fully compliant with the overarching objectives of the Capital Markets Union. 2  BIS central bankers’ speeches  Having better integrated markets within the European Union (EU) would also mean the emergence of more reciprocity issues as regards macroprudential policies. At the macro level, authorities should then closely review the potential additional vulnerabilities and risks attached to the CMU both at the domestic level and on a cross-border basis. Authorities will also have to strengthen their analytical framework and possibly complement their macroprudential instruments which are mainly bank-based at the current juncture. I will conclude with some remarks regarding longer term work, namely how to harmonize further domestic legal regimes and the institutional architecture. The Commission’s green paper has identified some areas for longer term work, including the need for further harmonization of insolvency regimes, securities laws and tax regimes.