these higher - priced assets can be used as collateral to secure loans. so as asset prices rise, so does collateral, thereby increasing the willingness of banks to supply credit. but in recent years this has been reinforced by some structural and regulatory changes. the growth of credit risk transfer through securitisation has tended to increase the proportion of banks ’ balance sheets that come under mark - to - market accounting. even gradual changes in the values of the underlying loans have tended to appear as abrupt changes in banks ’ trading and treasury books. when liquidity was abundant, asset values were high and marked - to - market profits were high. now that liquidity is scarce and asset values lower, mark - to - market losses and write - downs are high. the widespread use of credit ratings in valuing assets and managing counterparty credit risk has also had an impact. credit rating agencies try to rate through the cycle. and for corporate ratings they may well succeed. but for some structured finance products, such as re - securitisations of sub - prime backed securities they ( like many others ) misjudged the impact of a downturn in the cycle and the non linearity of returns. as a result, there have been wholesale downgrades of the credit ratings of structured securities over the past 12 months. the problem for the financial system is that these ratings are often hard - wired into decision making. certain classes of investors are forced to sell assets when they lose a aaa or investment grade rating. remuneration structures have also amplified risk taking in the upswing. two features of remuneration in the financial industry are that they are asymmetric ( there is unlimited upside for high performance but a floor on the downside ) and tend to be based on short - term targets. the asymmetry in reward creates an incentive to gamble and short - term performance targets encourage traders to follow rather than counter a deviation from longrun fundamentals. even where the incentives were paid in options linked to the medium - term performance of the employer, the apparent rewards have been highly cyclical. in addition, regulation can also encourage procyclical risk taking. basel i, for example, encouraged the growth of securitisation and the “ originate to distribute ” model of banking because holding the low risk elements of a loan portfolio in the banking book were relatively heavily capital - weighted. basel ii contains more carefully calibrated capital risk - weights and is a considerable improvement over basel i. but

inflation from our medium - term aim and of fragmentation in the euro area, which threatens the singleness of our monetary policy. the pepp ’ s anatomy provides the flexibility – across time, jurisdictions and market segments – that is needed to effectively counter the specific challenges that covid - 19 poses. this flexibility is a key element of pepp and will be maintained throughout its lifetime. thank you. 1 see, for example, autor, d. et al. ( 2017 ), “ the fall of the labor share and the rise of superstar firms ”, nber working paper series, national bureau of economic research, no 23396, may ; and gutierrez, g. and philippon, t. ( 2017 ), “ declining competition and investment in the u. s. ”, nber working paper series, no 23583, national bureau of economic research, july. 2 see ari, a., chen, s. and ratnovski, l. ( 2020 ), “ the dynamics of non - performing loans during banking crises : a new database ”, working paper series, no. 2395, ecb. 3 see, for example, vayanos, d. and j. - luc vila ( 2009 ), “ a preferred - habitat model of the term structure of interest rates ”, nber working paper no. 15487. see also krishnamurthy and vissing - jorgensen ( 2011, 2013 ) and d ’ amico and king ( 2013 ). 4 announcement effects are event - specific and may change over time. 5 see ecb ( 2020 ), “ ecb announces €750 billion pandemic emergency purchase programme ( pepp ) ”, 18 march. 6 see schnabel, i. ( 2020 ), “ how long is the medium term? monetary policy in a low inflation environment ”, speech at the barclays international monetary policy forum. 7 / 7 bis central bankers'speeches