began to recover and volatilities to decline. in fact, in both the united states and the euro area, some market valuation measures, such as p / e ratios, have returned to historical highs, potentially indicating a certain disconnect between the recent rapid and significant recovery in financial markets and the more moderate behaviour of macroeconomic data and the concerns over corporate sector weakness. in this respect, despite the slowdown in recent months in the rate of credit rating downgrades, following the sharp increase between march and may, the spreads on highyield corporate debt ( i. e. with a rating below bbb ) ceased to rise in june in europe and in the united states, and thus, in contrast to those on investment - grade corporate debt ( bbb or higher rating ), have remained below their pre - crisis levels. this deterioration in corporate credit quality is a further element of vulnerability for financial stability. past experience shows that extensive rating downgrades in the corporate sector can generate adverse second - round effects that exacerbate the crisis. the mechanism is as follows : since investment and pension funds, along with other institutional holders of corporate debt instruments, usually have restrictions in their mandates on their holdings of non - investment - grade assets, if many of these securities become high - yield they have to be sold by these investors, leading to a further decline in value and thus greater losses for all holders. the importance of this vulnerability is illustrated by a recent analysis conducted by the esrb. 10 specifically, it was estimated that, in europe, almost half of corporate bonds with a bbb rating are held by investment funds, around a third by insurance companies, almost a quarter by credit institutions and the rest by pension funds. investment funds and insurance companies are thus precisely the institutional investors that hold most of the bbbrated corporate debt, a third of which is associated with sectors considered as sensitive to covid - 19. a large - scale downgrading of this debt, to below investment - grade status, would entail considerable potential losses for the financial system of the european union ( eu ) as a whole, a significant part of which would correspond to indirect losses attributable to the forced selling mentioned above. the role of rating agencies in this process is fundamental. when making their assessments, these institutions need to take into account the long - term outlook for the corporation concerned and avoid excessively pro - cyclical behaviour. indeed, this time round, rating agencies appear to

central bankers ’ speeches it is important that the positive effects of our measures have also reached small firms because this means that they have been felt by a large audience and not just by specific economic and social groups, as is sometimes claimed. we must not forget that small and medium - sized enterprises make up 99 % of the total number of firms in europe and, more importantly, provide jobs for two - thirds of all those in employment. why were our monetary policy measures effective? one of the reasons that lending rates to firms were high in the past is that, given the weakness of economic conditions, banks particularly feared the risk of enterprises becoming insolvent, and for this reason raised their risk premia. however, these higher rates also caused the demand for credit from healthy firms to fall, thus worsening the conditions of the economy and justifying, ex post, the higher risk premia. and so a vicious circle was created. by reducing borrowing costs for new loans, our measures, especially the targeted longerterm refinancing operations, have encouraged banks to resume lending. the increased competition in credit markets has in turn compressed rates, driving lending and improving the macroeconomic picture. we have thus succeeded in breaking the vicious circle. the public and private sector purchase programme has also fuelled competition in credit markets by driving down the yields on sovereign bonds and thus reducing their appeal with respect to loans, ensuring that a growing volume of banking activity is directed towards the real economy. in addition to the direct impact of targeted longer - term refinancing operations, analyses conducted by the ecb show that the asset purchase programme has had an indirect effect on credit supply conditions, by also improving the macroeconomic outlook and further reducing risk premia. and these measures have not damaged the banks. far from it. although they may sometimes have led to a contraction in interest income, our measures have also led to capital gains in banks ’ assets, and higher volumes and quality of credit. considering all of these effects, the staff of the ecb estimate that the impact of our measures on the profitability of the banking sector has been essentially nil for the euro area as a whole. the role of other policies the effectiveness of our monetary policy shows that the ecb has all the appropriate tools to achieve our price stability objective and thus to support demand. and within our mandate we are unconstrained in our choice of instruments and the way we deploy them. we can always bring inflation to our objective ; we