borrowing facility, such as the discount rate or the marginal lending rate. the case there for moral hazard is not entirely obvious to me at least as long as ( 1 ) such a reduction is a measure used to steer short - term inter - bank rates close to the target level and ( 2 ) as long as the rate of the borrowing facility is in any case close to the target rate – e. g. one percentage point or less – so that a reduction has no substantial impact on the profit and loss accounts of banks. in this regard, the recent money market tensions have confirmed the importance for the effective liquidity management of banks of enjoying unimpeded access to borrowing facilities. the fourth potential moral hazard issue is a widening of the set of eligible collateral in a central bank ’ s monetary policy operations. admittedly, this type of measure could have moral hazard implications, particularly ( 1 ) if the general widening of the collateral set in fact targets a small number or, say, even a single bank under liquidity stress, which is rich in the specific type of additional collateral ; and ( 2 ) if the central bank offers facilities, for instance a standing borrowing facility, to effectively refinance such collateral. this type of action invites moral hazard as it may indeed be decisive to establish whether the single bank fails or not, while at the same time sparing to the banks ’ management and shareholders the substantial costs associated with resorting to real emergency liquidity assistance. therefore, a widening of the collateral set accepted for monetary policy purposes should probably only be considered if this measure would substantially help a significant number of banks and if the set of assets were very narrow. in this case the lack of collateral obviously seems to be more of a systemic issue, and the central bank should consider taking action. in this respect, let me underscore two features of our collateral framework that have served us well in the recent period. first, access to funding is available to a broad set of counterparties. and second, the eurosystem – whilst requiring high - quality standards – accepts a broad range of public and private fixed - income securities, as well as nonmarketable assets. hence, sufficiency of collateral has not been an issue for the eurosystem, even at the peak of the refinancing needs during the turmoil. finally, moral hazard is a potential issue in individual banks ’ emergency liquidity assistance. but here, it is up to the central banks and supervisors to ensure that

, it is easier for the central bank to support the economy as healthier banks tend to lend more. the worst case, to say it very bluntly, is of a central bank providing liquidity to banks just to buy or carry legacy assets, and the banking sector doesn ’ t restructure. this was typically the japanese situation in the early 2000s. perhaps paradoxically, a rigorous aqr and stress test helps monetary policy. appropriately treating banks ’ holdings of sovereign debt according to the risk that they pose to banks ’ capital makes it unlikely that the banks will use central bank liquidity to excessively increase their exposure to sovereign debt. this is because banks will be wary of the constraints placed on sovereign debt by the stress tests to which they are subject at the same time. therefore, should the procyclical impact of the aqr be significant, then monetary policy would be able to act – without hesitation and being reassured that the side effects of a liquidity injection that we have seen for the 2011 – 2012 operations would be minimised. so how would you assess whether the aqr was procyclical? don ’ t forget we have our two pillar approach : we analyse the business cycle, but we also look at money and credit. we will see from the second pillar very quickly if the credit situation doesn ’ t improve. at this stage of the recovery, what we see at the moment is quite normal. the big corporate firms do not have as many constraints as the smes. they have around €2trn in excess cash, they can access debt markets. the reluctance to invest comes more from the business confidence side. and if you did act because of the impact of the aqr, what exactly would you do? depending on the situation, the central bank can decide on the most effective way liquidity provision can be provided. there are no restrictions on the way a central bank provides liquidity to the banks via repo, a priori. bis central bankers ’ speeches you want to reach your price stability objective. at the same time, you want to be sure that when you provide liquidity against adequate collateral, it doesn ’ t reduce the incentive to restructure the banking sector. and so by having a well - designed comprehensive assessment – like the one we ’ re preparing now – we are easing the job of the central bank. bis central bankers ’ speeches