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

cannot be traded off in a binary sense. second, the public should not define financial stability as preventing all financial firms from failing. in other sectors of the economy firms fail without putting at risk the funds of the public or taxpayers ’ money. we will not truly have solved the too big or important to fail problem and thus the public money problem until we have tools at our disposal which enable us to resolve large institutions if they get into trouble. this will create the right incentives for risk management. and third, regulators must use their judgement to mount a robust challenge to stop dangerous business models and investment practices. this last point is vital. financial services is an industry where arbitraging rules and regulations is habitual, even addictive. money is made this way. we have no desire unduly to suppress enterprise and innovation, but doing the right thing and preserving financial stability means accepting the spirit of the rules. this is not a small change. let me give you one important example. the new basel agreement emphasises loss - bearing capital – capital that can bear losses outside insolvency. it must stay that way, and not be chipped away under the banner of arbitrage masquerading as innovation. i have been asked a number of times in the last week whether i think that the new basel agreement sets capital requirements high enough. my answer is that if the capital buffers are in future genuinely loss bearing capital with no tricky wrinkles, and we keep to this outcome, we have taken a good step forward. sadly, that was not the case with basel 1 in the late 1980s when i started out as a banking supervisor. the consultation document on regulatory reform in the uk published by the government at the end of july emphasised the need for a judgement - focused approach by regulators “ so that business models can be challenged, risks identified and actions taken to preserve stability ”. what does this mean? a primary focus of the new prudential regulation authority will be on determining whether the business models, governance and systems and controls of firms will enable them to satisfy the public interest in financial stability in future states of the world. that requires both a macro and micro prudential view, and for the two to come together to reach forward - looking judgements on whether financial stability is likely to be preserved in a range of plausible future outcomes. this range of outcomes is important, and it also underlines the need to build up the role of stress testing. such testing is