This principle relates to the dichotomy between the ECB’s monetary policy and its liquidity policy or, in other words, between the formulation and implementation of monetary policy. During the turmoil, the separation principle proved to be very effective. Supported by the flexibility of its operational framework, the ECB was able to react in a flexible and quick manner to a changing market environment, and it allowed the steering of interest rates close to the policy rate by means of temporary quantity adjustments, albeit without increasing the aggregate supply of euro liquidity to the banking sector. The main objective of the ECB’s immediate and lasting responses to tensions in the money market was to keep under to control the very short-term interest rates as the first step in the transmission of monetary policy. Broadly speaking, the ECB’s liquidity policy response consisted of three elements: First, it changed the timing of the liquidity provision within the maintenance period (the so-called “front-loading policy”), and thereby allowed banks to build up temporary liquidity buffers. Second, it lengthened the average maturity of its tender operations: before the turmoil, the bulk of liquidity was supplied through one-week operations, and only about 30% was auctioned for three months. As the turmoil unfolded, the ECB gradually increased the share of the three-month operations and moreover introduced a six-month maturity operation. Finally, it participated in the joint coordination effort of an increasing number of central banks around the world within the context of the Term Auction Facility.

The increased number of wealthy individuals has changed the demand for financial services. Traditional banking services or products, while maintaining a strong position in liquidity provision, are not adequate for people interested in diversification and maximisation of returns subject to risks in the context of long-term investments. The associated rise in demand for securities has led to an increasing need for brokerage, fund management and consultancy services. While there are new providers for these services, banks could remain at the centre stage, albeit with their services oriented more towards asset management. In addition to the overall increase in the wealth of individuals, the composition of wealth has shifted towards a greater emphasis on wealth in the form of financial assets. This is manifest in the increase in the relative market value of stock exchanges, which is clearly visible in most euro area countries. The increase in financial wealth relates closely to the shift towards a market-oriented financial system and also to the increased importance of institutional investors. BIS Review 83/2000  2  All the developments I have discussed so far underlie recent changes in the structure of the financial system. Financial systems in the euro area could be departing from a bank-dominated structure, becoming more market-oriented or even securitised. An indicator for this development is the declining share of deposits in households’ portfolios. Meanwhile, aided by technology, the disintermediation process on the assets side is under way in a number of countries, even though the process has been quite slow.