liability substitution operation without being forced to make largescale fire sales of assets that would lead to insolvency. concretely, for the eurosystem this meant abandoning its conventional framework for liquidity provision. we discontinued the practice to auction a pre - set quantity of liquidity and moved instead to an unlimited allotment of funds at a fixed rate. the tenors of our longerterm refinancing operations were extended from the pre - crisis standard of three months to six months in 2008 and to three years in 2011. we also expanded the universe of eligible collateral. in essence, we adopted a genuinely classical approach to our lolr responsibilities. this approach can be described by using the classical equation of exchange : b * m * v = p * y. this simple equation states that base money ( b ) times the money multiplier ( m ) times broad money velocity ( v ) – or the turnover rate of the broad money supply – is always equal to nominal income, i. e. the price level ( p ) times real output ( y ). the central bank is concerned with preserving price stability and supporting the economy, but it can do so only very indirectly and imprecisely by controlling base money, i. e. the sum of currency and bank reserves. therefore, in keeping with the monetary approach to lolr, base money should be expanded sufficiently aggressively with two intermediate objectives and one ultimate objective in mind. the intermediate objectives are : compensate for the fall in the money multiplier – and the decline in broad money velocity. the ultimate objective is to prevent the possibility of a collapse in broad money leading to a downward adjustment in nominal income. why do the money multiplier and broad money velocity tend to fall during confidence crises? the money multiplier is a complex function of the public ’ s preferred ratio of currency holdings to deposits and of banks ’ desired ratio of reserves to deposits. increases in uncertainty during times of crisis can impact on the behaviour of banks and the money - holding sector, leading to changes in these ratios, as banks prefer to hold larger reserves with the central bank as perceptions of counterparty risk increase, and – in the most severe episodes bis central bankers ’ speeches featuring bank runs – the public may try to convert bank deposits into currency. all of this alters the association between base money and broad money and increases the quantity of base money that the system demands in order to hold a given amount of broad money. turning to velocity

in the overall policy framework is broader, as it serves as the backstop for fluctuations in overnight money market conditions. it is because of this latter function in the settings of the stance that the responsibility for marginal lending is shared, as a eurosystem facility, among all national central banks ( ncbs ) of the euro area and the ecb. euro area credit institutions can receive central bank credit not only through eurosystem monetary policy operations but, exceptionally, also through ela. cases in point are banks which have run out of collateral considered as eligible under our monetary policy framework or whose counterparty status has been suspended on the grounds of prudence. technically, emergency liquidity assistance is activated when a eurosystem national central bank provides central bank money and / or any other assistance that may lead to an increase in central bank money to a financial institution or a group of financial institutions outside monetary policy operations. unlike the marginal lending facility, liquidity provision via ela is at the discretion of the providing ncb and this is why i refer to ela as embedding the credit approach to lolr. the main responsibility for the provision of ela lies at the national level, i. e. with the ncbs concerned. this means that any costs and risks arising from the provision of ela are incurred by the relevant ncbs. nevertheless, in order to ensure that ela operations do not interfere with the single monetary policy, the ecb ’ s governing council may object to or restrict the provision of ela, in line with the statute of the european system of central banks and of the european central bank and the ncb concerned and the institutions receiving ela are subject to a special information - sharing framework. furthermore, ela provision is monitored for compliance with the prohibition on monetary financing which applies to the eurosystem – and, in fact, to all the central banks of eu member states – and is laid down in the treaty. more specifically, the treaty stipulations pertaining to the prohibition of monetary financing ban any ela transactions akin to an overdraft facility or any other type of credit facility for a member state, and any financing of the public sector ’ s obligations vis - a - vis third parties, or any cases in which, through ela, the central bank de facto takes over a state task. moreover, ela provision is prohibited for insolvent institutions and institutions for which insolvency proceedings have been initiated according to national laws.