on the stability of mature financial systems 1. 1. i would like to briefly sketch two main features of this financial instability : first, while globalisation and financial integration have decisively contributed to improving overall economic efficiency, experience also suggests that financial asset prices have experienced in many occasions somewhat erratic movements resulting in overshooting and misalignments. this pattern applies to a wide range of markets : exchange rates as well as bond and equity markets in both emerging and mature markets. the very fast ballooning of the " new economy " bubble in 1999 and early 2000 - followed by a series of sharp corrections - illustrates the potential of markets to provide funding to the real economy, particularly to the most innovative sectors ; but it also demonstrates again some tendency of markets to over - react, moving from excessive optimism to disproportionate pessimism. thus, financial authorities have been confronted with boom - bust episodes which must be carefully monitored and assessed since they have the potential to affect the global monetary and financial stability. the second feature is a growing tendency towards volatility on financial markets, in the most advanced economies as well as in emerging markets economies. since the beginning of the mid - nineties, volatility has become higher on both international stock markets and foreign exchange markets. volatility per se is not an issue from a financial stability point of view. not only is volatility inherent to financial markets but it is taken into account in many areas of the operational frameworks of financial markets. however, the micro effects of volatility, particularly of unwarranted or unexpected volatility, may actually impair the smooth functioning of financial markets, through different channels. for instance : the asset pricing process and the determination of equilibrium prices is being complicated ; transaction costs and collateralisation costs increase ; the fragility of financial intermediaries ’ balance sheets increases ; the unequal ability of market participants to tackle volatility movements can increase polarisation among participants, and develop risks of an uneven playing field. ultimately, these effects may unduly raise the costs and bias the allocation of capital, a source of concern from a financial stability point of view. such a higher volatility may have a globally negative impact on market efficiency. indeed, higher volatility may lead to excessive risk aversion among investors and finally to a misallocation of capital, at both the global and sectorial levels. it may also lead to some lack of discrimination between different debt

at a fixed rate against adequate collateral ; a substantial lengthening of the maximum maturity of refinancing operations ; the extension of the list of assets accepted as collateral ; and the provision of liquidity in foreign currencies. these measures have served to improve financing conditions and credit flows above and beyond what could be achieved through reductions in the key ecb interest rates. while these measures clearly differ in their specific design and scope, they all follow the same guiding principle : a clear focus on the ultimate objective of price stability, supported by the intermediate target of ensuring depth and liquidity in dysfunctional market segments to restore the proper functioning of the monetary policy transmission mechanism. to that effect, they serve as complements to our standard monetary policy tools and can be unwound should upward pressures on price stability materialise. let me provide an example of this guiding principle, by looking at the most recent nonstandard monetary policy measures taken by the ecb, i. e. the long - term refinancing operations ( ltros ) decided in december 2011. the second half of 2011 was characterised by a renewed intensification of turbulence in sovereign debt markets, which quickly spilled over to the banking system. as a consequence, the access of euro area banks to market - based funding came under strain, as reflected, for instance, in a substantial surge of euro area money market spreads since july 2011. in the ecb bank lending survey more than half of all participating euro area banks reported a deterioration in wholesale funding conditions. without effective remedies, these developments could have severely undermined bank lending to firms and households and triggered broad - based selling of assets. the ltros were aimed at alleviating these adverse funding conditions. banks were able to satisfy their additional liquidity needs, in the context of a net liquidity injection of around €520 billion – taking into account the shifting of liquidity out of other operations. moreover, the ltros provided banks with a more certain medium - term funding situation owing to the longer maturity of the new operations. the full supportive impact of the three - year ltros will need time to unfold. any assessment of their impact on the economy can be only preliminary in nature at this stage. however, the data available to date give some encouraging signals. money and credit figures up to march confirm a broad stabilisation of financial conditions and thereby the avoidance of bis central bankers ’ speeches an abrupt and disorderly adjustment in the balance sheets of credit institutions