. by pursuing a balancing act to address low inflation and growth, the ecb managed to keep the euro area out of prolonged macroeconomic crisis and, at the same time, prevented an escalation of financial sector turmoil. ample provision of central bank reserves to the financial system mitigated shortterm funding difficulties, which, if not addressed, could have raised liquidity shortages and imperiled financial stability. however, such extensive measures do not come without potential costs or side effects for banks. in the following, i will refer to some of them : 1. side effects of monetary stimulus in a low interest rate environment. given the existence of a zero - lower bound on deposit interest rates10, a policy rate cut translates into a lower interest rate margin and reduces the net worth of banks. in turn, this reduction in bank net worth may lead to ( a ) a contraction in lending as banks try to avoid breaching regulatory ratios, ( b ) lower underwriting standards and ( c ) a search for yield. 2. everything else equal, the prolonged low interest rate environment dampened bank profitability and threatened the viability of their business model. the prevailing low interest rate environment of past years has been challenging for banks and resulted in decreased profitability, particularly for smaller institutions. net interest income constitutes the most important revenue source for banks ( especially for those with traditional business models ) and its subdued prospects took its toll on their market valuation. european banks traded significantly below book value for a prolonged period, especially in comparison with their us counterparts. 3. ample liquidity coupled with low funding cost for a prolonged period increased leverage of non - financial corporations and households. heightened leverage coupled with laxer credit origination standards may amplify the impact of worsening financial conditions for non - financial corporations and households, and of increased financing cost on banks'asset quality, in the current juncture of restrictive monetary policy and weakening growth. 4. 3 / 8 bis - central bankers'speeches 4. the low interest rate environment induced a search for yield by investors and financial institutions alike, resulting in reduced credit risk premia and increased maturity mismatches. suppressed risk premia could further encourage leverage, thwart efficient allocation of funding and mitigate " creative destruction " ( in the form of bankruptcies and restructurings ) in the corporate sector. recent data in many countries show a pickup in insolvencies and several analysts argue that the low interest rate environment, along with the pandemic and

##ing operations was extended, and the range of eligible assets that could be used as collateral in refinancing operations was expanded. 2 two very long - term refinancing operations ( vltros ) with a maturity of three years ( december 2011 and february 2012 ) were carried out. 3 targeted longer - term refinancing operations ( tltros ) were designed to provide ample liquidity to banks on very favourable terms based on the banks'lending performance. the first series was launched in june 2014, the second in march 2016 and the third in march 2019. 4 the ecb intervened ( from may 2010 to september 2012 ) by purchasing government bonds issued by certain countries via the securities markets programme ( smp ) and introduced ( in september 2012 ) the possibility to undertake outright monetary transactions ( omt ), i. e. purchases of government bonds subject to strict conditionality. 5 the asset purchase programme ( app ) was initiated in october 2014 and was significantly expanded by the public sector purchase programme ( pspp ) in march 2015. 6 by adopting the pandemic emergency purchase programme ( pepp ) in march 2020 and easing its collateral standards and the terms of the tltros - iii, to enable banks to extend credit to those hardest - hit by the pandemic. 7 according to ecb monthly bulletin, issue 3 / 2020, article on " negative rates and transmission of monetary policy ", empirical studies suggest a positive impact on loan growth of around 0. 7 pp each year, attributed to the negative interest rate policy. 8 https : / / twitter. com / ecb / status / 707936983239299073 9 see speech by philip lane at the 2020 us monetary policy forum, " the monetary policy toolbox : evidence from the euro area ", on 21 february 2020. 10 implying that banks are usually reluctant to pass negative rates onto their depositors, especially households. 11 see monetary dialogue with christine lagarde, committee on economic and monetary affairs, 19 november 2020. 8 / 8 bis - central bankers'speeches