liquidity needs to be carefully weighed against the need to avoid central bank losses or the moral hazard of encouraging excessive risk taking by financial institutions. lending against adequate collateral is one of the main ways in which major central banks can provide liquidity. if such lending is conducted on the basis of a carefully designed collateral management framework ( with eligibility criteria and risk control measures being of particular importance ), central banks can continue to inject considerable amounts of liquidity into the system without necessarily exposing themselves to additional risk. this is because, in entering into a repurchase agreement with a counterparty, the central bank is exposed to counterparty risk, but does not itself take on default risk. it can therefore unilaterally select the collateral it accepts, imposing haircuts on that collateral which its counterparties are expected to accept. haircuts safeguard the value of the collateral pledged to the central bank by protecting against liquidation risk and market risk, as well as mark - to - market losses owing to an increase in the credit risk implied by the collateral. in addition to haircuts, the central bank ’ s capabilities in terms of valuation and credit assessment are of crucial importance in an environment in which, owing to the market not functioning properly, central banks act as a backstop for financial activities. in normal times, market participants establish standards for credit quality and prices to which both buyers and sellers have an incentive to adhere. in instances when markets break down and investors disappear, central banks should, to the extent possible, consider stepping in to temporarily replace the industry as a market - maker of last resort. while the central bank could always compensate for poor valuation and credit assessment capabilities by means of draconian risk control measures ( e. g. by imposing very large haircuts ), this would result in the poor performance of its policy function of helping to overcome the liquidity crisis. the central bank ’ s flexibility in terms of its collateral management framework should be used wisely. in the presence of a liquidity crisis or a credit crunch, financial institutions find it difficult to fund their assets. credit lines are reduced or eliminated as other participants, faced with uncertainty, refuse to take on counterparty risk. indeed, central banks are the only market participants that can afford to be counter - cyclical in their behaviour. they continue to lend as before, being aware that both counterparty and collateral risks have increased. this “ inertia ” in central banks ’ behaviour in the money market was described in

european central bank press conference introductory statements introductory statements given by mr willem f duisenberg, president of the european central bank, and mr christian noyer, vice - president of the european central bank, held in frankfurt on 2 march 2000. * * * ladies and gentlemen, the vice - president and i are here today to report on the outcome of today ’ s meetings of the general council and the governing council of the ecb. the governing council conducted its regular examination of the outlook for price developments in the euro area. after reviewing the evidence available from both the first and the second pillar of the monetary policy strategy of the eurosystem, the governing council decided to maintain the interest rate on the main refinancing operations of the eurosystem at 3. 25 % and the interest rate on the marginal lending facility and that on the deposit facility at 4. 25 % and 2. 25 % respectively, i. e. at the levels determined a month ago. the governing council also concluded that the balance of risks to price stability in the medium term remains on the upside. these upside risks will need to be monitored and assessed continuously in order to ensure that timely action can be taken, if and when required. the main elements of our assessment of the latest information on monetary, financial market and other economic developments are as follows. starting with the monetary indicators covered under the first pillar of the monetary policy strategy, the three - month average of the annual growth rates of m3 for the period from november 1999 to january 2000 was 5. 7 %, compared with 6. 0 % in the last quarter of 1999. the reduction was determined by a base effect, since the monthly increase in m3 in january 1999 was exceptionally strong, reflecting the special environment at the start of stage three of economic and monetary union. at the same time, the annual growth rate of credit to the private sector remained high, at 9. 5 % in january 2000. overall, the prolonged deviation of m3 growth from the reference value of 4½ %, especially when seen in conjunction with the dynamic growth of credit, indicates that liquidity conditions in the euro area remain generous. with regard to the second pillar, as usual, the governing council examined a broad range of indicators. starting with long - term nominal interest rates, there was little change in the course of february. the yield curve remained relatively steep, thus indicating expectations of strong economic growth in the period ahead. such expectations are partly based on the favourable outlook for the world economy