: principles and design, amsterdam : north holland publishing company. 5. trichet, j. c. ( 2008 ), “ some lessons from the financial market correction ”, speech at the “ european banker of the year 2007 ” award ceremony frankfurt am main, 30 september ; trichet, j. c. ( 2011 ), “ monetary policy in uncertain times ”, speech at the bank of finland 200th anniversary conference, helsinki, 5 may. 6. bordes, c. and clerc, l. ( 2013 ), “ the ecb ’ s separation principle : does it ‘ rule ok ’? from policy rule to stop - and - go ”, oxford economic papers, vol. 65, pp. i66 – 91. 7. honohan, p. ( 2018 ), “ real and imagined constraints on euro area monetary policy ”, working paper 18 - 8, peterson institute for international economics, august. 8. ecb ( 2021 ), an overview of the ecb ’ s monetary policy strategy. 9. martin, a., mendicino, c. and van der ghote, a. ( 2021 ), “ on the interaction between monetary and macroprudential policies ”, ecb working paper series 2527. 10. as explained by martin et al. ( 2021, ibid. ), a simple rationale comes from an “ envelope - theorem ” argument : a local deviation from the central bank ’ s focus on price stability would lead to second - order losses with regard to inflation but could lead to first - order gains with regard to financial stability. said differently, it may be worthwhile to temporarily tolerate small deviations from the 2 percent inflation target if this yields large gains with respect to financial stability. 11. this can be done, for example, by flexibly adjusting the medium - term horizon over which inflation is brought back to target, by prioritising tools with lower side effects, and by designing monetary policy tools in a way that mitigates financial stability risks. see schnabel, i. ( 2021 ), “ monetary policy and financial stability ”, speech at the fifth annual conference of the european systemic risk board, 8 december. 12. schnabel, i. ( 2020 ), “ the ecb ’ s monetary policy during the coronavirus crisis – necessary, suitable and proportionate ”, speech at the petersberger sommerdialog, 27 june. 13. ecb ( 2020

higher bank bond issuance, keeping bank funding overall broadly stable ( slide 15, left - hand side ). by contrast, in the united states, a much larger share of deposits appears to have been shifted into money market funds ( slide 15, right - hand side ). while parts of those funds may have been circulated back to banks, some may have flown into the overnight reverse repo facility ( on - rrp ), thereby reducing banks ’ excess liquidity. but also in the euro area, the shift from overnight deposits into higher - yielding alternatives implies that net interest margins are bound to shrink over time, as funding costs eventually rise more strongly than banks ’ interest income in many cases. as shown by sensitivity analyses to a 200 basis point interest rate shock, the impact on banks ’ long - run performance is less benign than suggested by the short - run positive effect on net interest income. due to a duration mismatch, the economic value of equity of most euro area banks drops over the long run in response to rising interest rates ( slide 16, left - hand side ). [ 32 ] the analyses also show that banks ’ exposure to interest rate risk has increased since the start of the tightening cycle ( slide 16, left - and right - hand side ). the impact of higher interest rates on the economic value of equity is again heterogeneous and depends, among other things, on the composition of the banks ’ asset side. banks with a higher share of mortgages are expected to experience a much sharper decline in the economic value of equity than those with a lower share ( slide 17, left - hand side ). this is because mortgages were, on average, granted at low rates and with a relatively long duration, exposing banks to interest rate risk. similarly, banks with a lower share of reserves in total assets are more sensitive to interest rate hikes, as they may be forced to liquidate marketable assets at low prices in case of withdrawals ( slide 17, right - hand side ). taken together, the longer - run and heterogeneous impact of rising interest rates needs to be monitored carefully, including banks ’ strategies to deal with those challenges. risks can be mitigated via hedging strategies or a larger share of variable rate loans. but hedging contracts do not offer perfect protection as they may be subject to counterparty risks. even variable rate loans can give rise to vulnerabilities as interest rate risk may be converted into