remains exceptional, and be designed in a way that is compatible with sound incentives in the banking system. rationale for liquidity regulation i would like to begin by briefly highlighting the micro - and macro - prudential benefits that will derive from a new set of liquidity standards. in particular, they should lead to an increase in individual credit institutions ’ liquidity buffers, and reduce the risks posed by maturity transformation. the recent financial crisis provided a dramatic illustration of how liquidity risk materialises. the inadequacies of banks ’ liquidity management became apparent when some markets for long - term debt securities ( including abs, abs cdos, etc. ) experienced a sudden re - pricing, resulting from the fact that risks were not properly reflected in their prices. banks faced bis central bankers ’ speeches substantial liquidity outflows and shortages owing to their excessive exposure to these instruments and their excessive reliance on short - term and volatile secured market funding sources. in the us, this phenomenon mainly materialised as a “ run on repo ” ; 1 in the euro area, it resulted into drying up of foreign currency funding, severe strains in bank unsecured funding, and / or a reduced access to repo through clearing houses. in all cases, the central bank had to step in and to expand its liquidity provision to banks. what does this imply for liquidity regulation? regulations should start from first principles, and we therefore have to identify the market failures or negative externalities that liquidity regulation aims at addressing. i consider that there are three main objectives for liquidity regulation : a ) to reduce the impact of uncertainty on the bank risk profile, b ) to build up liquidity buffers and c ) to mitigate the systemic characteristics of a liquidity crisis. maturity transformation gives rise to liquidity risk since, by definition, a bank engaging in maturity transformation cannot honour sudden and large withdrawal requests by depositors. they may face similar difficulties if interbank market lenders refuse to roll over their loans. such coordination failure may arise not because the depositors or the interbank market participants think the bank is likely to be insolvent, but because they anticipate others will withdraw. 2 the rationale of liquidity requirements is that they reduce the impact of uncertainty on the bank risk profile, since they allow the bank to withstand larger withdrawals. lolr and deposit insurance are other ways to achieve the same means : mitigating the risk of a run. the difference

christine lagarde : hearing at the committee on economic and monetary affairs of the european parliament introductory statement by ms christine lagarde, president of the european central bank, before the hearing at the committee on economic and monetary affairs of the european parliament, brussels, 6 february 2020. * * * madam chair, honourable members of the economic and monetary affairs committee, ladies and gentlemen, i am very happy to appear before this committee shortly after the first governing council meeting of 2020, during which the ecb decided to launch a review of its monetary policy strategy. more than 16 years have passed since the ecb last reviewed its strategy. and as we discussed in december, since 2003 the world economy has undergone profound structural changes that have transformed the environment in which monetary policy operates. more specifically, declining trend growth on the back of slowing productivity growth and an ageing population, and the legacy of the financial crisis have driven interest rates down. this low interest rate and low inflation environment has significantly reduced the scope for the ecb and other central banks worldwide to ease monetary policy in the face of an economic downturn. and structural challenges, such as new threats to environmental sustainability, rapid digitalisation, globalisation and evolving financial structures, have also affected price developments and, therefore, the environment that central banks monitor, forecast and need to factor into their policies. in the light of these changes, now is the appropriate time for us to conduct a strategy review with a broad scope to ensure we continue to deliver on our mandate in the best interest of europeans. during my last hearing before this committee i made a commitment to listen to people ’ s expectations and better understand their economic concerns. this parliament will be the primary forum for this listening exercise and for putting into practice the principle of two - way communication that i outlined here in december. so i am very happy that you have asked me to discuss central bank communication with you today. but before i get to that, allow me first to provide an overview of the current economic situation in the euro area. the euro area economy and the appropriateness of the ecb ’ s monetary policy stance broadly in line with our expectations, the euro area economy continues to grow, though still with modest momentum. the domestic economy remains relatively resilient. private consumption, for instance, increased by 0. 5 % in the third quarter of 2019 on the back of further improvements in labour market conditions. the unemployment rate stands at 7. 4 %, its lowest since july 2008. the number