have seen that unconventional measures are effective in terms of arresting disinflation, preventing fears of a slide into deflation and supporting aggregate demand. but it is fair to say that we need to understand more about their transmission in order to see whether qe can be retained as an instrument that, if not conventional, can play a valuable and reliable role in the toolbox to which central banks can make recourse. remark 3 : zlb and non - conventional policies pose extra challenges vis - a - vis normalisation. looking ahead, when the monetary policy tightening cycle eventually commences, it is very likely to be different and more challenging than in previous cycles. just try to picture the recent history of policy rates for some major central banks in a chart. that chart would look odd on both the y - axis and the x - axis : in some major economies, zero has featured for longer than any other value of the policy rate before. this makes some of us think that the nonlinearity imparted by the lower bound and generally thought to apply to the policy rate on the way down may exert, for different reasons, an impact also on the way out of the lower bound. the economy may have just gotten too used to that number. for one thing, rate increases will have to be carefully aligned with the normalisation of central bank balance sheets. there will be some division of tasks between instruments to be thought through and organised : what portion of accommodation can be removed – quite conventionally – by raising shortterm rates, and what portion by active management of portfolios, i. e. by applying controlled pressure on long - term rates. the profile and evolution of short - term rates and the shape of the term structure will probably look different than in previous normalisation cycles. the ecb is a long way from these challenges, but other central banks are confronting these as i speak. b. euro - area specific remarks in respect of the euro area, these general remarks require some modification. for brevity, let me focus on two aspects. remark 4 : the ecb hit the lower bound later than many other central banks, and when it did it was not the zero lower bound, but a negative lower bound. similarly, it resorted at a late stage to large - scale asset purchases. it stands out that the ecb ’ s monetary policy became distinctly unconventional at an early stage – not least with the adoption of fixed - rate full allotment tenders in

the standard deviation of banks ’ return on equity trebling comparing the forty - year periods either side of “ at goldman sachs, we calculate the fair value of our positions every day, because we would not know how to assess or manage risk if market prices were not reflected on our books. this approach provides an essential early warning system that is critical for risk managers and regulators ”, lloyd blankfein, financial times, october 13 2009. quoted in seligman ( 2003 ). 1970. there is also evidence of banks ’ equity prices having exhibited higher correlation as fair value principles have been extended. 18 consider a hypothetical experiment. imagine banks in the uk had been required to mark their banking books to market over the period 1999 to 2008, in addition to their trading book. market prices are used to proxy different categories of loan. for example, residential mortgage backed securities ( rmbs ) and covered bond prices are used to proxy mortgage loans. as with banks ’ trading books, all gains and losses arising on the banking book are assumed to flow directly to profits. chart 6 plots the path of uk banks ’ profits, both actual and simulated under the mark to market assumption. simulated profits are around eight times more volatile. between 2001 and 2006, uk banks ’ cumulative profits would have been around £100 billion higher than recorded profits, as the expected future returns to risky projects were brought forward. this would have been the 21st century equivalent of capitalising the ashes in the blast furnace. for what goes around comes around. hypothetical losses during 2008 would then have totalled in excess of £300 billion, as the risk from these projects was realised. the ashes in the furnace truly turned to dust. had shareholders not already torn it out, this rollercoaster ride in profits would have been hair - raising. in this admittedly extreme case, it is questionable how much shareholder protection fair values would have delivered in practice. “ fundamental misalignment ” a related but distinct issue arises when market prices deviate from their true values for a protracted period. marking to market then runs the risk not just of unwarranted volatility but unjustifiable bankruptcy. take a bank whose liabilities are perfectly maturity matched with its 10 - year assets. so there is no necessity for the bank to liquidate its assets to make good its liabilities as they fall due. but the market price of the banks ’ assets might well embody a premium for instant liquidity – a liquidity premium. as chart 5