luis de guindos : measures to support monetary policy transmission through banks welcome address by mr luis de guindos, vice - president of the european central bank, to the money market contact group, frankfurt am main, 24 september 2019. * * * in its most recent policy meeting, the ecb ’ s governing council decided on a comprehensive easing package because the downward revisions in the projected inflation path warranted a vigorous policy response. the easing package comprised five measures : lowering the deposit facility rate, strengthening the forward guidance on the likely path of policy rates, restarting the net asset purchases within the asset purchase programme, changing the terms of the third series of targeted longer - term refinancing operations ( tltro iii ) and introducing a two - tier system for reserve remuneration. we believe that the measures announced last week complement each other and together constitute an effective response to the environment that the ecb currently faces. these decisions were taken against the following background. first, as a result of continued global uncertainties and their impact on confidence, our latest ecb staff macroeconomic projections were revised down. we face a more protracted economic slowdown than previously anticipated and see persistent downside risks to the growth outlook. second, inflation continues to fall short of expectations. headline inflation remains well below our medium - term aim, while core inflation has been hovering around 1 % for an extended period of time. market - based indicators of future inflation outcomes have stagnated at historical lows and the profile for headline inflation has been revised down, leading to a further delay in the convergence of inflation towards our aim. the case for a monetary policy response was clear and a comprehensive package of measures was judged to be the most effective response. i will take this opportunity to delve a little deeper into two of the measures that may be especially relevant for the banking sector. the first is the changes to some of the parameters of the third series of targeted longer - term refinancing operations – tltro iii – and the second is the implementation of a two - tier system for the remuneration of excess reserves. changes to the tltro iii programme you may recall that tltro iii was announced in march to preserve the very favourable bank lending conditions in the euro area and to ensure the smooth transmission of our highly accommodative monetary policy stance. at the same time, indexing the tltro iii rates to the main refinancing operations rate and the

cost per unit of time of converting a financial asset into money. when market liquidity collapses – in a liquidity crisis – assets that had enjoyed high tradability become illiquid in the sense that trimming exposures is possible only at a large penalty. alessi, l. and c. detken ( 2011 ), “ quasi real time early warning indicators for costly asset price boom / bust cycles : a role for global liquidity ”, european journal of political economy, vol. 27 ( 3 ), pp. 520 – 533. claessens, s., m. a. kose and m. e. terrones ( 2011 ), “ financial cycles : what? how? when? ”, imf working paper no. 76. hollo, d., m. kremer and m. lo duca ( 2012 ), “ ciss – a composite indicator of systemic stress in the financial system ”, ecb working paper no. 1426. jorda, o., m. h. p. schularik and a. m. taylor ( 2011 ), “ when credit bites back : leverage, business cycles and crises ”, nber working paper no 17621. bis central bankers ’ speeches • funding liquidity – an alternative, if complementary concept – measures the ability of a financial institution which engages in maturity transformation to obtain constant funding for its long - term assets. this distinction is at the centre of brunnermeier ’ s and pedersen ’ s ( 2009 ) analysis on the interplay between leverage and liquidity cycles. here, the authors show the reinforcing nature of funding shocks and leverage in shadow - banking intermediation. 6 here, a funding shock materialises in the form of higher haircuts in the repo market, where intermediaries operating in the shadow - banking market – say, a hedge fund – finance the acquisition of assets. for a hedge fund that is financing asset holdings in the repo market, mechanically, a rise in haircuts that is not offset by either slack in the existing equity capital base or an infusion of fresh equity capital will cause the fund to liquidate assets. a collective trend to liquidate assets cannot happen unless prices drop. but a fall - off in asset prices devalues the collateral that is pledged in parallel leveraged operations and more margin calls are triggered. so, the original funding liquidity shock turns into an asset market