, do not necessarily serve well the public ’ s interest in assessing policy responses to the market turmoil. the eurosystem ’ s operational framework thus, before explaining what the ecb has done, let me briefly outline some elements of the eurosystem ’ s operational framework that have proved crucial to enable it to continue influencing short - term money market rates in spite of the difficult situation in financial markets. the operational framework of the eurosystem has been chosen with great care to function both in normal and stressful times. 5 it aims at steering short - term money market rates close to the main policy rate in a smooth and efficient manner, with the primary aim of implementing the monetary policy decisions of the governing council of the ecb. 6 it consists of elements that are regularly employed and those that can be activated should the need arise. in particular, this framework comprises three categories of instruments : 1 ) open market operations, 2 ) minimum reserve requirements and 3 ) standing facilities. 7 even though open market operations include several different operations, the eurosystem has so far almost exclusively conducted two types : refinancing operations, through which liquidity is temporarily lent to counterparties against eligible collateral and at a minimum bid rate which signals the monetary policy, and the collection of fixed - term deposits ( use of reverse transactions ) for fine - tuning purposes, which are used to temporarily absorb ( provide ) liquidity from ( to ) counterparties. moreover, banks must hold a certain amount of liquidity to fulfil their reserve requirements ( calculated as a ratio of their short - term liabilities ). this requirement needs to be fulfilled on average over each reserve maintenance period, which is approximately one month long. the eurosystem offers on each operating day two standing facilities which can be accessed at the discretion of individual banks, namely a deposit facility and a marginal lending facility. at their own initiative, banks can place liquidity in the deposit facility on an overnight basis, at a rate which is decided by the governing council and is normally one percentage point below the policy rate ( the minimum bid rate in main refinancing operations ), while they can borrow overnight liquidity against eligible collateral via the marginal lending facility at a rate which is normally one percentage point above the policy rate. with these instruments, the eurosystem implements the monetary policy decisions of the governing council of the ecb. more precisely, by using these instruments the eurosystem manages liquidity conditions in the euro area money market so

traditional activity of banks consists of providing liquidity transformation services, by collecting short - term deposits in order to finance the provision of loans with longer maturities. as a result, banks intrinsically face a maturity mismatch in their balance sheets that exposes them to funding liquidity risks. under supposedly extreme circumstances ( that the experience of northern rock suggests may not be that extreme ), the maturity mismatch may even imply the risk of a bank run. this brunnermeier, m. k. and l. h. pedersen, “ market liquidity and funding liquidity ”, forthcoming in review of financial studies. may happen if large numbers of depositors perceive liquidity conditions ( or solvency, for that matter ) at a specific institution as untenable and rush to withdraw their deposits in waves. several mechanisms and policies have been developed over time for prevention and resolution of bank runs. these include deposit insurance schemes ( whether privately or publicly funded ), regulatory and supervisory policies ( e. g. on reserve and capital requirements ) and the possible recourse to emergency liquidity assistance from the central bank ( the “ lender of last resort ” classic policy prescription ). the “ originate and hold ” vs. “ originate and distribute ” models the characterisation of the liquidity risks faced by banks i have made so far conforms to that of the so - called “ originate and hold ” business model, according to which banks create loans to firms and households and hold them to maturity in their balance sheets. however, in recent decades, many banks have taken advantage of financial innovation and of developments in securitisation to progressively shift towards the so - called “ originate and distribute ” model. under this new model, banks originate loans but sell them to structured investment vehicles ( often set up by themselves ) to be repackaged and subsequently sold as asset - backed securities. in principle, this business model is attractive for banks since it provides them with a new source of financing to expand lending, thereby mitigating their funding liquidity risks, while also allowing them to economise on costly capital requirements. indeed, it has been argued that regulatory capital arbitrage has been one of the main reasons why banks have adopted the “ originate and distribute ” model. also from the point of view of the economy as a whole, the “ originate and distribute ” model could be viewed as having many advantages. first, being capital costly, the ability to sustain a given level of credit