repurchase agreement markets as many banks no longer wanted to accept securitised products as collateral. only government bonds remained fairly liquid, although some price differentiation across countries has been seen due to differences in public finances. it became obvious that the deteriorating market liquidity had a negative impact on funding liquidity : the originate - and - distribute banking business model took a hit due to an almost complete dry - up of the securitisation market. this environment poses challenges for central banks, as addressing funding liquidity shortages may require assisting market liquidity. clearly, the nature of the turbulence matters : concerns for market liquidity itself could in principle be addressed by central bank actions, whereas central bank liquidity operations would be ill positioned to tackle individual counterparty solvency concerns. 1 along these lines, let me explain how we as central banks responded to changing needs with operational measures and increased international cooperation. 3. central bank responses let me sketch with a broad brush the various actions the major central banks have implemented in the course of the turbulences. clearly, the responses varied across central banks, reflecting differences in the extent to which markets have been hit by the turbulences, and differences in the design of their operational frameworks. but in general terms, central banks tried to address the liquidity squeeze in similar ways, acting on four fronts : first, central banks acted to keep short - term money market rates in line with their policy rates ( or targets ) through more active reserve management, reassuring banks of their orderly access to overnight funds. they increased the frequency of operations to respond with greater sensitivity to shifts in the demand for reserves. second, central banks sought to ease pressures in broader funding markets through a combination of measures : • they increased the supply of longer - term funds via discretionary operations to accommodate the demand for term funds. see “ central bank operations in response to the financial turbulences ”, cgfs papers, no 31, july 2008. • most of the central banks expanded to varying degrees the collateral accepted in collateralised lending operations, and included in some cases securitised assets that have been particularly affected by the liquidity squeeze. • moreover, they widened and improved the access of counterparties to collateralised lending from the central bank, to facilitate the distribution of central bank funds and increased the scale of those operations. • some central banks increased securities lending to improve the functioning of interbank repo markets. third, central banks increased their co - operative efforts both through enhanced communication

euro has coincided with a remarkable deepening of financial integration. the financial landscape has already changed enormously in most market segments. well - integrated financial markets and diversified portfolios reduce the extent to which firms ’ and households ’ saving and spending decisions are dependent on economic and financial developments in a specific country, region or sector. as a result, credit and risk - sharing channels are increasingly helping to attenuate the impact of shocks in a specific euro area country or sector. this financial market - based mechanism essentially means that consumption does not need to follow movements in regional output. there are two reasons for this : first, consumers can borrow from abroad ; and second, their financial wealth is less dependent on local conditions thanks to well - diversified international portfolio allocation. this also gives rise to greater competition, resulting in more favourable financing conditions for consumers and firms. in this regard, there is a very interesting study looking at the united states that i like to cite. according to this study, the us capital markets smooth out 39 % of shocks to gross state product ( equivalent to our gdp ), the credit channel smooths out 23 % of such shocks, and the federal budget smooths out 13 %. 25 % of the shock is not smoothed out. thus, according to this study, financial markets and financial institutions absorb 62 % of idiosyncratic shocks in the united states : an effect much larger than that of the federal budget. the euro area is moving in this direction, and i am sure that financial market - based risk - sharing will become increasingly important over the coming years. c ) the third area of strength is the fact that the euro area as a whole has become more resilient to external developments than its individual member countries ever were before the launch of the euro. national economic policies have become better coordinated, and of course the risk of possible speculative attacks on national currencies has been removed. not so long ago, the impact of movements of the us dollar vis - a - vis major european currencies was significantly aggravated by big tensions inside the exchange rate mechanism namely between the currencies that have now merged to form the euro. this can no longer happen. this increasing resilience is illustrated by the fact that the major shocks of the last ten years have not played a significant role in the dispersion of output growth and have not contributed to economic divergence. * * * ladies and gentlemen, let me now conclude. although there is still some persistent diversity across euro area