benoit cœure : non - standard monetary policy measures – where do we stand? speech by mr benoit cœure, member of the executive board of the european central bank, at the international monetary seminar “ sovereign risk, bank risk and central banking ” organised by the banque de france, paris, 10 july 2013. * * * i wish to thank peter karadi for his contributions to this speech, and oreste tristani for his comments. i remain solely responsible for the opinions contained herein. ladies and gentlemen, it is a great pleasure to be at the banque de france today to speak at the 2013 international monetary seminar. in my remarks, i would like to look back on the policy actions, and especially the non - standard measures, undertaken by the ecb over the past five years. as in other countries, such measures were ultimately inspired by the goal of averting the risk of more severe consequences of the financial crisis on the macroeconomy and, ultimately, on price stability. the exact non - standard measures deployed to achieve this goal, however, differ across economic areas. i would like to take this opportunity today to highlight how the specific measures implemented by the ecb were designed to tackle the peculiar euro area phenomenon of “ financial fragmentation ” – that is, the observation of fault lines in the flow of funds between savers and borrowers specifically shaped along national borders, and accompanied by capital repatriation and sharp increases in the home bias. financial fragmentation has manifested itself in the form of strong divergences between sovereign yields and ensuing differences in the cost of funding across banks, depending on the country in which these banks operate. in turn, owing to the relationship aspects of bank lending, cross - country fragmentation in banks ’ funding costs have been reflected in a disparity of financing conditions offered to firms, with an increase in the dispersion in retail interest rates on loans, and especially small loans, to non - financial corporations. lending rates have tended to follow the path of key ecb rates in some countries, but not in others. while the rate charged by the ecb on its main refinancing operations ( the so - called mro rate ) was cut by 50 basis point between end - may 2012 and end - may 2013, the rate charged by banks on their loans to non - financial corporations went down by more than 50 basis points in germany, 25 basis points in spain and less than 20 basis points in portugal. 1 all in

all, financial fragmentation has exacerbated cyclical fluctuations, leading to an inefficient allocation of capital across countries and altering in an erratic fashion the transmission of monetary policy impulses. under such circumstances, and within the ecb price stability mandate, some of our non - standard monetary policy measures have been geared at responding to financial fragmentation. in so doing, we have followed three general principles. • the first principle is the simplest and best understood. it prescribes that any provision of excess liquidity should be specifically targeted towards the market which is most impaired by funding constraints. this principle ultimately amounts to ensuring that the provision of liquidity produces the most beneficial effect per unit of intervention. the ecb adhered to this principle, for example, when in 2008 it rates on outstanding loans to non - financial corporations over 1 and up to 5 years. rates went down, respectively, from 3. 46 % to 2. 93 %, 3. 8 % to 3. 55 % and 5. 2 % to 5. 03 %. source : ecb. bis central bankers ’ speeches decided to apply full allotment in its liquidity - providing tender operations. this policy ensures that liquidity can automatically reach the sets of banks with greater funding difficulties. • the second principle derives from the observation that fragmentation has been the result of an unwarranted increase in certain risk premia – notably, liquidity or funding risk premia and redenomination risk premia. the causality goes, however, in both directions, as financial fragmentations can lead to an unwarranted rise in risk premia, and the outcome of this cumulative and potentially self - fulfilling process can be devastating. our non - standard measures have therefore incorporated an element of insurance against those risks. for our liquidity - providing operations, the element of insurance is represented by the extension of their maturity to up to three years with the vltros. in the phase of the crisis when funding risks were highest, the vltros have not just helped to overcome current funding constraints ; they have also represented a commitment to mitigate those constraints over the future, so as to reduce ex ante funding risk. a similar element of insurance is clearly present in the design of our outright monetary transactions ( omt ) programme, which is designed to address tail risks of currency redenomination. • the third principle is the direct consequence of the second. it is well known that any provision of insurance