in december 2022 that it will conduct a review on the matter. the bank of finland, and particularly our experts at the market operations department, are participating actively in this work. i would like to thank particularly niko herrala, who is heading one of the ecb's workstreams, and also juha niemela and marjaana hohti, who are members of the ecb's market operations committee. 6 / 9 bis - central bankers'speeches interest rates can be controlled in many ways. this is clear just from the way in which central banks in different countries have decided to conduct monetary policy in the postpandemic era. the ecb too, has experience of different frameworks for controlling interest rates. in the pre - financial crisis era, the supply of reserves was kept scarce. this ensured that banks had to acquire reserves via main refinancing operations, which in turn ensured that short - term money market rates settled close to the main refinancing rate ( point a in the chart ). the marginal lending and deposit facility rates were, in turn, set so that the main refinancing rate was in the middle of the interest rate corridor formed by these two rates. in recent years, the supply of reserves has clearly exceeded the level of the minimum reserve requirement. banks must deposit excess reserves with the central bank on a daily basis, and therefore the money market interest rates closely follow the ecb's deposit facility rate ( point c in the chart ). a contraction in the balance sheet means a reduction in the amount of excess reserves. the decreasing amount of reserves, if it persists, will start pushing up short - term money market rates above the deposit facility rate ( point b in the chart ). in such a situation, volatility in money market rates may also increase considerably. this in turn, can increase the risk premia demanded by markets if the central bank does not respond to the situation via monetary policy implementation. the eurosystem has at least two options for preventing such an outcome : it can narrow the interest rate corridor, or it can, by conducting structural operations, ensure a sufficient supply of excess reserves in the future, too, so that the new balance does not slide ( in the chart ) too much to the left. slide 12 : narrow interest rate corridor limits volatility in money market rates if the central bank narrows the gap between its lending rate and deposit facility rate, there will be

proposed that there would be an additional layer of designated bail - in instruments to further improve the loss - absorption capacity of banks. we believed that this would best combine loss absorbency and market discipline with legal certainty and the stability of markets. the designated bail - in instruments would have clear pre - specified terms and holding restrictions which would prevent other banks from holding these debt instruments. the holding restrictions would reduce the risk of contagion within the banking sector and thus constrain the fear of triggering a systemic crisis at the time of a capital conversion or a write - down. in addition, we proposed that the governance and control of banks ought to be strengthened further. particular attention ought to be given to the ability of management and boards to run large and complex banks, the powers of the risk management function and the quality, comparability and transparency of risk disclosure, the possibility to use designated bail - in instruments in remuneration schemes, and the appropriateness of imposing caps on variable as well as overall compensation. we also saw the need to enhance the sanctioning powers of supervisors so as to ensure enforcement of risk management responsibilities. how the hleg proposals address the malign diagnosis of the size and structure of the banking sector subsidiarisation of trading facilitates resolution by making bail - in rather than bail - out a more credible option. the recommendation that banks should have a layer of designated bail - in instruments further supports the aim of making bank bail - out at taxpayers ’ risk only a rare exception. only functions that are essential to the functioning of the society, i. e. the deposit taking and payment system, would benefit from a government guarantee. as a result, the separated trading activities will be funded from the market at a price better reflecting the true riskiness of the operations. this is expected to restrain incentives for excessive growth and risk taking in the trading entity. the recommendations will not only have an impact on the size of the financial sector, but also on what kind of operations there will be. first of all the proposals reduce the distorted incentives which endangers socially optimal allocation of resources. for example, as the subsidy of the implicit government guarantee is reduced, competition particularly in the trading activity is revitalised, which will improve the allocation of funds in the economy. moreover, separation restricts banks with insured deposits from engaging in high - risk trading bis central bankers ’ speeches activities which are not essential to deposit banking. the efforts of the deposit bank are thus expected to be