operation twist and its implications for qe2 ( pdf ), ” federal reserve bank of san francisco working paper 2011 – 08 ( san francisco : federal reserve bank of san francisco, february ), www. frbsf. org / publications / economics / papers / 2011 / wp11 - 08bk. pdf. bis central bankers ’ speeches another significant policy action taken at last week ’ s fomc meeting is that the principal payments from our holdings of agency securities will now be reinvested in agency mbs rather than in treasury securities. our announcement appears to have been successful in narrowing the spread between rates on agency mbs and treasury securities of comparable maturity. that spread had widened substantially since earlier this year, and the continuation of such a trend could have pushed up mortgage rates and adversely affected the housing sector. potential attenuating factors in my judgment, the federal reserve ’ s deployment of our policy tools has been completely appropriate in promoting maximum employment and price stability. ideally, such policy decisions would be informed by precise quantitative information about the effects of each tool. in reality, however, the estimated effects of the fomc ’ s policy actions are subject to considerable uncertainty. such uncertainty is intrinsic to real - world monetary policymaking at any time but is particularly relevant under circumstances where the scope for conventional monetary policy is constrained by the zero lower bound on the federal funds rate, leaving unconventional tools as the only means of providing further monetary accommodation. although these monetary policy tools have been successful in pushing down interest rates across the maturity spectrum, the magnitude of the transmission to economic growth and employment has been somewhat more muted than i might have expected. indeed, it seems plausible that the effectiveness of our policy tools is being attenuated by a number of unusual persisting factors, including an excess supply of housing and impaired access to credit for many households and small businesses. under normal circumstances, residential construction is an interest - sensitive sector of the economy that has played an important role in contributing to previous economic recoveries – especially the brisk recovery that followed the steep downturn in 1981 and 1982. in the wake of the bursting of the housing bubble, however, the housing sector has remained exceedingly weak. in effect, there is an excess supply of housing that seems likely to decline only gradually despite the record - low level of mortgage rates. thus, in this crucial sector, one can argue that lower interest rates have not shown through to higher activity in the same way that would be expected under more usual

haircuts on lending against those securities increased ( chart 5 ). both the risk - averse moneyseeking investors and the leveraged risk - seeking investors on either side of the dealers ’ balance sheets questioned the liquidity and solvency of many of those dealers. maturities shortened dramatically until most transactions were at overnight maturities, rolling daily ( gorton et al, 2014 ). some dealers experienced “ runs ”. financing terms for leveraged investors tightened sharply, causing some to fire sale assets and adding to market instability. in the us, the market infrastructure was flawed, with the daily unwind of tri - party repo transactions relying on massive intra - day financing from private sector clearing banks. 8. 5 % is the sum of the 6 % minimum tier 1 to risk - weighted assets ratio plus the 2. 5 % capital conservation buffer under basel iii. bis central bankers ’ speeches since the crisis, regulators have addressed many of the underlying problems of excessive leverage and maturity transformation : a. securities financing transactions are included in the internationally - agreed leverage exposure measure adopted by the basel committee 4. leverage ratio requirements will put prudent limits on the size of dealers ’ matched books. b. they are also included in the basel committee ’ s measures to address liquidity risks. the recently - announced net stable funding ratio 5 will require short - term secured loans to financial and non - financial borrowers to be backed by at least 10 % stable funding. and supervisors can use the liquidity coverage ratio 6, as we have been doing for some time in the uk, to require dealers to hold liquid assets against prime brokerage risks such as withdrawal of cash margin by hedge fund clients. c. the financial stability board has agreed minimum haircuts 7 in order to limit the leverage that non - banks can obtain through borrowing cash against private sector securities. these haircut floors have deliberately been set at “ backstop ” levels designed to prevent excess in times of market exuberance while allowing room for prudent firms to do their own risk management. d. the us authorities have taken steps to strengthen the tri - party infrastructure. the reforms are not yet complete. one important missing ingredient is data collection to monitor market trends more closely. for example, the authorities need to understand the composition of the collateral being used across key financial markets in order to identify concentrations. the financial crisis showed the risks associated with a market - wide margin call when widely - used collateral is subject to an unexpected common price shock