uncharted territory. interest rates have been reduced to very low levels by historical standards, clearing the way for significantly lower bank interest rates ( although with a significant time - lag ), thus supporting credit demand from households and firms. at the same time, non - conventional measures have been adopted with the aim of bringing abnormally high money market spreads down and ensuring a proper transmission of the monetary policy impulse. these exceptional measures have had important effects on macroeconomic and financial stability, and improved the overall conditions on financial markets. 19 in particular, they have helped to “ liquefy ” assets that could otherwise have caused the insolvency of many financial institutions. more generally, they have helped to restore confidence by reducing uncertainty. in addition, they have prevented contagion effects that can arise in the financial system as a result of the inter - connectedness between various market participants. the monetary policy intervention also helped to restore the profitability of banks as the fall in short - term interest rates steepened the yield curve, to the benefit of the banking system, which usually funds itself in the short term in order to provide credit for longer terms. this profitability also helped to support the flow of credit to the economy. financial measures have also been adopted, such as increased deposit insurance, guarantees for bank liabilities, and injections of capital. in addition, fiscal budgets have supported aggregate demand via automatic stabilisers and expansionary measures. over the last few months, leverage has generally fallen, especially among those institutions that were most highly leveraged. 20 the fall reflects, in part, recapitalisation efforts, lower risktaking as a result of more prudent lending standards, and the shedding of assets and / or limitation of the growth in balance sheets. it also reflects pressure from the market and supervisory authorities to control leverage, as well as expectations regarding the possible introduction of a leverage ratio, in addition to risk - based capital requirements. 21, 22 likewise, capital position ratios of large and complex banking groups in the euro area are improving. the earnings of these banks have recovered, while the growth of total assets and of risk - weighted assets has slowed down and capital has increased, both from public and private sources. these developments were necessary in view of the expected increase in non - performing loans as a delayed result of the economic crisis. w. bagehot, “ lombard street : a description of the money market ”, scribner, armstrong & co.,

its lowest point in almost three decades. 14. lane, p. r. ( 2022 ), “ the euro area outlook : some analytical considerations ”, speech at bruegel, 5 may. 15. in september 2020, for example, i made the argument that “ the risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react and the worst - case scenarios materialising. ” see panetta, f. ( 2020 ), “ asymmetric risks, asymmetric reaction : monetary policy in the pandemic ”, speech at the meeting of the ecb money market contact group, 22 september. 16. soderstrom, u. ( 2002 ), “ monetary policy with uncertain parameters ”, the scandinavian journal of economics, vol. 104, no 1, pp. 125 - 145. 17. in previous speeches i have distinguished between good, bad and ugly inflation. good inflation is driven by domestic demand and wages consistent with our target, which monetary policy should seek to nurture until that target is reached. bad inflation reflects negative supply shocks that raise prices and depress economic activity, which monetary policy should look through. ugly inflation – the worst type of inflation – is driven by a de - anchoring of inflation expectations, which monetary policy should immediately stamp out. see panetta, f. ( 2021 ), “ patient monetary policy amid a rocky recovery ”, speech at sciences po, 24 november, and panetta, f. ( 2022 ), “ small steps in a dark room : guiding policy on the path out of the pandemic ”, speech at an online seminar organised by the robert schuman centre for advanced studies and florence school of banking and finance at the european university institute, 28 february. 18. based on premia - adjusted one - year forward inflation - linked swap rates. sources : refinitiv, bloomberg, and ecb calculations. 19. levine, p. et al. ( 2008 ), “ risk management in action : robust monetary policy rules under structured uncertainty ”, working paper series, no 870, ecb, frankfurt am main, february. 20. ecb ( 2022 ), “ april 2022 euro area bank lending survey ”, 12 april. 21. recent survey data were weaker than expected. in particular, in april 2022 the economic sentiment indicator for the euro area declined significantly ( from 114. 5 in february 2022 to 105 in april