dollars. • fourth, the ecb extended the eligibility of collateral that could be used for central bank financing, facilitating banks ’ refinancing liquidity shortages caused by halts in interbank lending. • fifth, the ecb introduced in may 2010 the securities markets programme. by intervening in the secondary markets of public and private debt securities, the ecb could ensure depth and liquidity in dysfunctional market segments and restore the proper functioning of the monetary policy transmission mechanism. • finally, in september 2012, the ecb announced the outright monetary transactions ( omt ) initiative, essentially the intention to purchase, if necessary, securities of euro area member - states in economic adjustment programmes from the secondary market. although not activated, the announcement of the initiative has contributed significantly to the improvement in financial market conditions, the decline in sovereign bond spreads and the gradual reversal of financial fragmentation. changes in the eu architecture • with the outbreak of the euro area crisis, it was made clear that both imbalances in the real economy and in the financial sector are sources of financial instability. • a more comprehensive policy framework was therefore necessary. • in this context, improvements in the policy framework aimed at completing the emu architecture with more coordination of economic policies, sufficient backstops to address liquidity shortfalls and, last but not least, common supervision of the financial sector. • the stability and growth pact was strengthened through a series of eu regulations in 2011 and 2013. the new legislation clearly defined debt reduction rules, sanctions in case of non - compliance and a new surveillance procedure monitoring the emergence of macroeconomic imbalances. in addition, fiscal coordination and surveillance was further strengthened through the ex - ante co - ordination of fiscal and structural policies of member states of the euro area. • moreover, the “ fiscal compact ”, agreed by the euro area and some eu member states, in march 2012 further strengthened fiscal governance. the treaty, which entered into force at the beginning of 2013, requires structural deficits limited to 0. 5 % of gdp and the introduction of fiscal rules in each country ’ s national legislation. • furthermore, the euro area, as well as some eu member states agreed in march 2011 on the “ euro plus pact ”, a commitment to undertake additional reforms, on top of the eu - wide “ europe 2020 ” obligations, to promote competitiveness, employment and productivity. • in the meanwhile, the european financial stability facility ( efsf ) provided financial assistance to sovereigns which faced temporary liquid

##dependence is necessary for the smooth operation of the single monetary policy, because it facilitates the transmission of monetary policy throughout the euro area. • the prevailing view was that persistent capital flows from the north to the south, which financed the current account deficits of the south during the early years of emu, were an equilibrating force – capital moved from countries where the rate of return on investment was low to those where it was high. • the elimination of exchange rate risk was interpreted by markets and institutions as an elimination of all risks. credit risk was essentially ignored. • with the outbreak of the global financial crisis in 2008 and the re - pricing of risk, the ample capital inflows to the eu periphery were suddenly reversed. • this sudden reversal led to a negative feedback loop between banks and public finances, exacerbating the effects of financial instability on the real economy. • in some countries, such as spain, the sudden reversal led to a collapse in demand, a collapse in asset prices and bank distress. the bank distress then fed back into a fiscal and, ultimately, sovereign crisis. a similar narrative can be told for ireland. in other member - states, such as greece, the sudden reversal initially affected the refinancing of debt and subsequently inflicted damage on the banking system following the haircut of greek government debt. • as a result, the crisis revealed important weaknesses in the eu architecture and inadequacies in the implementation of the structures that had been put in place. bis central bankers ’ speeches • first, the existing framework of economic governance was not sufficient to prevent the creation of imbalances. the stability and growth pact was not properly enforced and there was no mechanism in place for monitoring external imbalances. • second, the increased interdependence between financial institutions and markets, which was the result of the monetary union and the ensuing financial integration, was not accompanied by a more unified regulatory framework. • third the link between financial stability and the financial cycle had been largely ignored. the architects of monetary union chose to keep financial sector supervision and regulation largely at the level of the nation state, with insufficient coordination of macro and micro - prudential supervision. policy responses to the crisis • in this unprecedented global crisis, governments, central banks and international organizations reacted with coordinated actions. these actions included first, direct monetary and fiscal interventions, aiming at enhancing liquidity to maintain system stability and support the economy ; second, a broader mobilization to res