loans market has been hampered by the fact that a number of banks active in this market have large balance sheet exposures to sovereign debt issued in the past by countries now under stress. since the beginning of the sovereign debt crisis, these “ affected ” banks ’ supply of syndicated credit has been almost 20 % lower overall than it would have been if tensions in government bond markets had not been present. all these points illustrate well the decisive role played by the banking sector in the inception and development of the euro area crisis. this is crucial not just for our understanding of how the euro area sovereign debt crisis came to be, but also for how we ensure that we avoid its repetition. the financial and macroeconomic imbalances built up by the activities of european banks until 2007, together with the international financial crisis, were the prime movers of crisis in europe. without this, the sovereign debt crisis would not have been nearly so severe. addressing financial imbalances all this raises the question, however, as to why financial imbalances were not given more attention prior to the crisis. the limitations of the intellectual climate part of the reason is that the approach taken towards financial integration and banking activity reflected two features of the dominant economic thinking at the time. see a. alter and a. beyer, “ the dynamics of spillover effects during the european sovereign crisis ”, cfs working papers, no. 2012 / 13, 2012 ; popov, a., and n. van horen, 2013. the impact of sovereign debt exposure on bank lending : evidence from the european debt crisis. ecb mimeo. bis central bankers ’ speeches first, that the private sector was essentially stable and self - correcting, composed of fully rational agents always optimizing inter - temporally with knowledge of the future probability distributions to infinity of economic returns and variables. in such a world, no defaults were admitted or dangerous bubbles possible. only the public sector could create instability – hence, the stability and growth pact was supposed to be sufficient to ensure stability. second, that finance did not matter for real economy fluctuations. after the real business cycle school, the rational expectations hypothesis and the intertemporal optimization paradigm, money and finance were considered no longer relevant. while money crept back in the new consensual macro model through the introduction of wage and price rigidities, allowing for short - term real economy effects of monetary policy, finance continued to be invisible with the efficient market hypothesis ensuring a reliable plumbing of

more expensively. this suggests that direct effects were likely to have been only of a limited nature throughout most of the programme. you can also see this from the very loose relationship between our total purchases of german bonds and the two - year swap spread on the left side of slide 8. of course, we cannot rule out that the shift in the maturity composition of our public sector purchase programme ( pspp ) since the removal of the lower floor for purchases – and the associated change in the market ’ s expectations of the future availability of short - term bonds – have accelerated the fall in rates at the front end of the curve in recent weeks. but when we announced on 8 december 2016 that purchases below the deposit facility would in principle be allowed, the short end of the yield curve, where such purchases could be expected to be more intense, reacted only little, as you can see on the right side of slide 8, which compares the german curve shortly before and after the announcement. so, unlike the announcement effect on the 10 - year tenor that i showed you at the beginning, the announcement of 8 december seemed to contain limited news for investors. this could mean that investors had already priced in, to a large extent, the possibility that we would allow purchases below the dfr. indeed, in the weeks before our 8 december meeting we had seen a marked widening of the two - year swap spread that you can see if you go back to slide 4. but because this period coincides with the aftermath of the us election, we cannot be entirely sure if it was the anticipation of our policies, flight to safety or a combination of both that contributed to the widening of spreads. however, what i can rule out is that the intensity of our purchases has played a decisive role on a day - to - day basis, as the daily purchase amounts have been fairly constant. interestingly, when we started purchases of sovereign bonds with yields below the deposit facility rate, yields at the short end actually increased. over the past three weeks, too, we have seen short - term yields increasing despite continued eurosystem purchases. the supply of short - term safe government bonds let me now briefly turn to the other side of the coin – the supply of safe assets. typically, debt management offices have some flexibility in their issuance behaviour. but for some of them the funding plans are relatively stable. this means that supply often tends to be inelastic in the short term and a sudden build - up of demand can cause