##ated structural implications which may have gradually affected the efficiency of the financial markets since their outset. • first, credit derivatives and, more generally, structured credit markets have affected banks ’ perceptions of risk and propensities to lend when granting credit. however, it is not enough to consider in this regard the enhanced potential to clearly separate credit and liquidity risks and thus to enhance specialisation. as we have clearly witnessed over the last couple of years, by apparently transferring the credit risk associated with the issuance of credit, some banks may have eroded issuing criteria and thus contributed to an overvaluation of assets. • second, credit derivatives and structured credit markets have transformed the way banks operated. innovations in credit portfolio management practices have had profound implications for the banking business model. many banks have moved from the “ buy - and - hold ” model to the “ originate - and - distribute ” model, whereby they distribute credit risks they originated to other market participants. in this respect, banks have increasingly performed the role of active portfolio credit risk manager in addition to credit provider. in particular, they have increasingly found structured credit products an attractive mechanism for reducing exposure concentrations in their loan books, while also allowing them to meet the needs of their corporate customers. these evident advantages of the new way of operating, together with the possibilities offered for capital regulatory arbitrage, seem to have overshadowed the disadvantages, such as the excessive focus on returns and short - termism. • third, credit derivatives and structured credit markets have transformed the financial system at large, whereby the risk re - allocation activity may have become just as important as – and in some cases a full substitute for - the more traditional capital allocation. whilst the aggregation and structuring of credit risks and their subsequent transfer to market participants with different investment horizons, asset / liability structures and risk appetites made evident the virtues of the model, it downplayed the now evident fact that the recipients of the risks were often vulnerable in terms of managing liquidity, interest rate and systemic credit risks. overall, these three structural implications of credit derivatives and structured credit markets may in a normally functioning financial system bring about increased opportunities and productivity in the banking intermediation business. whether this partially explained the fast growth of bank credit in the euro area during the years before the crisis, possibly above the level that can be explained on the basis of its traditional determinants, is a conjecture that remains to be substantiated. what is clear is that, going forward,

over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. in this context, the concerns of private investors about seniority will be addressed. furthermore, the governing council may consider undertaking further nonstandard monetary policy measures according to what is required to repair monetary policy transmission. over the coming weeks, we will design the appropriate modalities for such policy measures. let me now explain our assessment in greater detail, starting with the economic analysis. on a quarterly basis, euro area real gdp growth was flat in the first quarter of 2012, following a decline of 0. 3 % in the previous quarter. economic indicators point to weak economic activity in the second quarter of 2012 and at the beginning of the third quarter, in an environment of heightened uncertainty. looking beyond the short term, we expect the euro area economy to recover only very gradually, with growth momentum being further dampened by a number of factors. in particular, tensions in some euro area sovereign debt markets and their impact on financing conditions, the process of balance sheet adjustment in bis central bankers ’ speeches the financial and non - financial sectors and high unemployment are expected to weigh on the underlying growth momentum, which is also affected by the ongoing global slowdown. the risks surrounding the economic outlook for the euro area continue to be on the downside. they relate, in particular, to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. downside risks also relate to possible renewed increases in energy prices over the medium term. euro area annual hicp inflation was 2. 4 % in july 2012, according to eurostat ’ s flash estimate, unchanged from the previous month. on the basis of current futures prices for oil, inflation rates should decline further in the course of 2012 and be below 2 % again in 2013. over the policy - relevant horizon, in an environment of modest growth in the euro area and well - anchored long - term inflation expectations, underlying price pressures should remain moderate. risks to the outlook for price developments continue to be broadly balanced over the medium term. upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term. the main downside risks relate to the impact of weaker than expected growth in the euro area, in particular resulting from a further intensification of financial market tensions. such intensification