granted at maturities longer than two weeks. this “ insurance scheme ” encouraged banks to maintain those lending relations with their clients that are central to europe ’ s financial architecture. at the same time, it helped bolster public confidence that banks would remain solvent. the financial panic that developed in mid - september 2008 marked a dramatic turning point. interbank trading in the euro area and elsewhere came to a virtual halt. as cash - rich banks were unwilling or unable to lend to cash - deficient institutions, the ecb had to substitute for the missing interbank trading. we started to provide credit well above the levels that banks had absorbed to fulfil their reserve requirements in normal times. since october, against a background of a drastic deterioration in global conditions, falling commodity prices and rapidly receding inflationary pressures, the ecb has stepped up its crisis resolution measures in an extraordinary effort to protect the functioning of our financial system and the stability of our economies. again, our primary concern was to preserve the availability of credit for households and companies at accessible rates. under our new “ fixed - rate full allotment ” tender procedure, banks have been granted access to essentially unlimited liquidity at our policy interest rate. to fully appreciate what this means, one should note that in normal times we auction a given amount of central bank credit and let competition among bidders determine the interest rate at which that credit will become available to the banking system as a whole. but, as the demand for liquidity by individual institutions has expended abnormally and markets have ceased to perform their allocative function, we have turned that practice around. we now determine the lending rate and we stand ready to fill any shortage of liquidity that might occur at that interest rate. we currently surrogate the market in both its allocative and price discovery functions. we have also considerably lengthened the list of eligible assets that banks can pledge as collateral, so as to ease banks ’ balance sheet constraints and facilitate the liquefaction of bank assets for which markets could find no price. the intention was to encourage banks to extend new credit or continue rolling over maturing loans. traditionally, the number of counterparties that are eligible to take part in our refinancing operations – both ordinary and long - term – has been the largest among the major central banks that are most directly comparable to the eurosystem. this structural feature of our operational framework has been instrumental in the first stages of the crisis in ensuring that all

may usefully supplement other market data available to central banks as a means of monitoring expectations and sentiment. let me give just two examples. first, in the foreign exchange market, whereas the forward rate may provide a point estimate of the expected future rate, data on option prices for different strike prices can provide a probability distribution for the future rate. this additional information, available only as a byproduct of derivatives trading, may be of interest to market analysts, including the monetary authorities. within the hkma we have conducted some research into this, which we are in the process of discussing with academics and other technicians. second, with exchange traded products, where levels of activity are clearly visible, sudden surges or collapses in turnover may hint at shifts in sentiment for one reason or another. although it may not always be clear what story best fits a particular statistical movement, it is sensible to be alert to such developments and try to understand the signals which they may give. operations it may be considered natural for central banks, like any other financial institutions, to be active on their own account in the derivatives markets. nevertheless, there are perhaps one or two cautions which might apply in the case of central banks. if a central bank is trading for profit - as it would usually be when, for instance, managing its foreign currency reserves - it may be presumed to follow the normal trading strategies of any portfolio manager, within specified guidelines and subject to appropriate risk controls of course. derivatives may usefully be part of that, providing an efficient avenue for pursuing trading or hedging opportunities. it seems entirely reasonable for the central bank to be allowed to operate in this way, but, in derivatives as in the cash markets, the central bank may need to balance the objectives of fund management against those of its own monetary or exchange rate policy. there is also a question whether derivatives should be used as a deliberate tool for monetary policy purposes. typical examples would be use of foreign exchange forwards or options to assist in maintaining exchange rate stability. a couple of years ago, partly in response to some academic debate on the subject, the hkma did in fact examine the case for the exchange fund to write currency options. we concluded as follows : " … the writing of currency options by the hkma appeared to be technically feasible and might be consistent with currency board principles if properly designed ….. in theory at least, the writing of currency options by a central bank could be a useful tool in helping to stabilise exchange markets