european central bank : press conference a€ “ introductory statement introductory statement by mr jean - claude trichet, president of the european central bank and mr lucas papademos, vice - president of the european central bank, brussels, 4 december 2008. * * * ladies and gentlemen, the vice - president and i are very pleased to welcome you to our press conference here in brussels. i would like to thank governor quaden for his kind hospitality and to express our special gratitude to his staff for the excellent organisation of the meeting of the governing council. we will now report on the outcome of today's meeting, which was also attended by mrs lagarde, president of the ecofin council, and commissioner almunia. on the basis of its regular economic and monetary analyses, the governing council decided to reduce the key ecb interest rates by a further 75 basis points. this step follows the two 50 - basis point reductions in the key ecb interest rates announced on 8 october and 6 november 2008. overall, since our last meeting, the evidence that inflationary pressures are diminishing further has increased and, looking forward, inflation rates are expected to be in line with price stability over the policy - relevant horizon, supporting the purchasing power of incomes and savings. the decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity. largely related to the effects of the intensification and broadening of the financial turmoil, both global demand and euro area demand are likely to be dampened for a protracted period of time. at the same time, while the underlying pace of monetary expansion has remained strong, it has continued to decelerate further. all in all, the level of uncertainty remains exceptionally high. the governing council will continue to keep inflation expectations firmly anchored in line with its medium - term objective. in so doing, it supports sustainable growth and employment and contributes to financial stability. accordingly, we will continue to monitor very closely all developments over the period ahead. allow me to explain our assessment in greater detail, starting with the economic analysis. since september, there has been an intensification and broadening of the financial market turmoil. tensions have increasingly spilled over from the financial sector to the real economy, and the world economy as a whole is feeling their adverse effects. in the euro area, a number of the downside risks to economic activity that were identified previously have materialised, leading in the third quarter to a contraction of 0.

traditional activity of banks consists of providing liquidity transformation services, by collecting short - term deposits in order to finance the provision of loans with longer maturities. as a result, banks intrinsically face a maturity mismatch in their balance sheets that exposes them to funding liquidity risks. under supposedly extreme circumstances ( that the experience of northern rock suggests may not be that extreme ), the maturity mismatch may even imply the risk of a bank run. this brunnermeier, m. k. and l. h. pedersen, “ market liquidity and funding liquidity ”, forthcoming in review of financial studies. may happen if large numbers of depositors perceive liquidity conditions ( or solvency, for that matter ) at a specific institution as untenable and rush to withdraw their deposits in waves. several mechanisms and policies have been developed over time for prevention and resolution of bank runs. these include deposit insurance schemes ( whether privately or publicly funded ), regulatory and supervisory policies ( e. g. on reserve and capital requirements ) and the possible recourse to emergency liquidity assistance from the central bank ( the “ lender of last resort ” classic policy prescription ). the “ originate and hold ” vs. “ originate and distribute ” models the characterisation of the liquidity risks faced by banks i have made so far conforms to that of the so - called “ originate and hold ” business model, according to which banks create loans to firms and households and hold them to maturity in their balance sheets. however, in recent decades, many banks have taken advantage of financial innovation and of developments in securitisation to progressively shift towards the so - called “ originate and distribute ” model. under this new model, banks originate loans but sell them to structured investment vehicles ( often set up by themselves ) to be repackaged and subsequently sold as asset - backed securities. in principle, this business model is attractive for banks since it provides them with a new source of financing to expand lending, thereby mitigating their funding liquidity risks, while also allowing them to economise on costly capital requirements. indeed, it has been argued that regulatory capital arbitrage has been one of the main reasons why banks have adopted the “ originate and distribute ” model. also from the point of view of the economy as a whole, the “ originate and distribute ” model could be viewed as having many advantages. first, being capital costly, the ability to sustain a given level of credit