policy decisions through liquidity management. with these principles in mind, let me turn to the monetary policy responses to the crisis. at a very general level, the ecb used conventional tools – an aggressive easing of the policy rate – to counter deflationary pressures and unconventional tools, which aimed at restoring a well - functioning transmission mechanism. these policies were pursued in four phases. 1. between july 2007 and the fall of 2008, the ecb responded to disruption in interbank markets by expanding its liquidity provision to commercial banks. 2. between the fall of 2008 and end - 2009, as the financial crisis escalated and turned from a liquidity crisis into a solvency crisis, the ecb lowered its policy rate in quick steps to an unprecedentedly low level. in addition, it also employed a range of unconventional tools – such as fixed - rate full - allotment at the weekly tenders, longer - term refinancing operations. bis central bankers ’ speeches 3. the third phase extends from end - 2009 to mid - 2011. as the macroeconomy rebounded and financial market conditions improved in late 2009, the ecb started a gradual exit from its unconventional measures. when the sovereign crisis hit euro area bond markets in the early months of 2010, the eurosystem responded to an increasingly dysfunctional monetary transmission mechanism, by activating a special markets program ( smp ). 4. when the sovereign crisis intensified in august 2011, the gradual exit from unconventional was stalled. also, additional unconventional measures were taken to support the monetary transmission mechanism. these policy responses went a long way in supporting the ecb ’ s goal of price stability, and to address problems in the monetary transmission mechanism. at the same time, these measures – and the smp in particular – entailed a number of risks. as i mentioned in earlier speeches and interviews, i see four main risks. first, these measures tended to reduce pressure that markets exerted on governments to pursue fiscal discipline. second, treading further along the path of interventions in government bond markets implies increasing risks of monetary financing of fiscal debt. third, purchases of assets in markets under stress implies a financial risk for the eurosystem ’ s balance sheet, which may eventually lead to fiscal transfers. fourth, there is a risk that the eurosystem will enter political waters, which will make the conduct of monetary policy more difficult. with our experience during the crisis and the connected risks in mind, we need to rethi

nevertheless believe it could be an effective way for capital markets union to contribute to consistent pricing of risk across countries. for it will help ensure a homogeneous, but risk - consistent transmission of monetary policy decisions. 10. but capital markets union can deliver on more than just that. it can also greatly increase the efficacy of monetary policy. common to all monetary policy decisions is that their transmission to the real economy is sluggish and can sometimes be incomplete. for example, the extent to which banks are able to lower lending rates following a rate cut depends on many factors beyond the control of monetary policymakers. one can think of the level of competition in the banking sector, or the health of bank balance sheets. a successful capital markets union will open up entirely new channels for the transmission of monetary policy to the real economy, making central bankers much less dependent on a single sector for the transmission of its policy decisions. in that sense, central banks can diversify the channels through which they can influence the economy, adding to its effectiveness. 11. note that economic agents can benefit from capital markets union in a very similar way. households and firms can diversify their dependency on financing, if alternative sources of finance are in abundance, making themselves less vulnerable to risks stemming from a single sector. a well - diversified financial structure increases the resilience of the balance sheets of households and corporations to shocks. and the resilience of the economy as a whole. and when an economy is better able to cope with external shocks, monetary policy will not get distracted from pursuing its primary remit : delivering price stability. 12. the latter is even more relevant for monetary policy in a monetary union. structural differences between national economies imply that the euro area economy is prone to asymmetric shocks. private sector risk - sharing across countries can greatly enhance a smooth transmission of such shocks. this is what capital markets union can accomplish, for an increase in the cross - border holdings of financial instruments will enhance risk - sharing across the euro area, thus improving the functioning of the monetary union. 13. however, capital markets union is no silver bullet. clearly, its introduction does not absolve us from pursuing prudent policies in other policy areas, too. moreover, it will take time before we can reap the full benefits of capital markets union. but there can be no doubt that it will prove an important complement to banking union in enhancing the functioning of our monetary union. 14. at the same time, capital markets union will