hit, helping cushion the initial financial turbulence. and as the crisis unfolded in successive “ waves ” and materially altered our market environment, we adopted further measures to meet the new challenges we faced. we are thus now presented with an important question – should we treat these changes as temporary imperatives that should be withdrawn as soon as conditions permit, or should they form a permanent part of our operational framework? to answer this, we need to ask : of all the challenges we have faced during the crisis, which ones are likely to persist? and which measures should we retain to deal with them? in my view, there are two challenges that stand out. the first is how monetary policy should adapt to structural shifts in financial intermediation. the second is how to cope with the constraints imposed on central banks by the effective lower bound of interest rates. shifts in financial intermediation financial intermediation in recent years has been characterised by two structural shifts, one of which was specific to the euro area and one of which is global. bis central bankers ’ speeches in the euro area, financial markets underwent severe spatial fragmentation in the early phase of the crisis, with intermediation retreating behind national borders and impairing the bank lending channel of monetary policy. many of the changes to our operational framework during the crisis were a reaction to this. for example, the move towards fixed - rate full allotment liquidity provision, the widening of our collateral framework and the extension of the maturity of our lending operations acted as crucial stabilisers and averted sudden stops in market funding for national banking systems. while this problem has now largely disappeared, it would be complacent to see it as completely resolved. some key components of our banking union ( such as the build - up of the single resolution fund and the removal of national options and discretions in bank supervision ) are still being phased in, and some key drivers of fragmentation, such as the bank - sovereign nexus, remain unsolved – not to mention a lingering risk of political fragmentation. the second structural shift in patterns of intermediation, a global one, is linked to financial regulation. tighter financial regulation is both increasingly affecting the behaviour of supervised entities, and encouraging a parallel shift towards unregulated forms of finance. this dual process has repercussions for monetary policy implementation. it increases demand for safe short - term instruments to meet new regulatory requirements, such as the liquidity coverage ratio and margin requirements for derivatives. and it

the second challenge – the effective lower bound – recent evidence suggests that real neutral rates have fallen to very low levels, driven by both cyclical and structural forces. 1 this challenge is common to advanced economies but it is more pronounced in the euro area than in the us, given its markedly lower rate of potential output growth. in this context, all major central banks reduced interest rates to very low levels, thereby approaching the effective lower bound on interest rates. they responded to this via different measures : providing forward guidance, launching large - scale purchases of public and private sector assets, and – in our case – by implementing a negative interest rate policy, which has in fact uncovered that the effective lower bound is lower than was previously thought. these measures have been very effective in supporting output and inflation and anchoring medium - term price stability. however, they were taken on the implicit assumption that they would be transient, both because monetary stimulus would help counter the cyclical forces depressing the real equilibrium rate and because other economic policies would provide cyclical support and tackle the more structural drivers of low real rates. but if other economic policies do not in fact play this role, then we cannot exclude that the real equilibrium rate remains low. as such, we may see short - term rates being pushed to the effective lower bound more frequently in the event of macroeconomic shocks ; and the stimulus provided by lowering interest rates to that level would be of course be much weaker. for central banks to retain a handle on output and inflation, then, unconventional policies may have to be deployed more frequently. but this would come with at least three complications. first is the question of the operational target. a target focused on short - term interest rates makes sense when this is the main policy variable, but if short - term rates are persistently pushed towards the lower bound, monetary policy has to focus on a wider constellation of rates across different maturities and asset classes. what then is its target? central bankers currently offer quantity targets in these cases – a volume of assets to be bought per month – but price targets are only given in general terms, for instance “ flattening the yield curve ”. this is appropriate so long as balance sheet policies are temporary. it may not be in the long term, but moving to price targets may come at the expense of price discovery. this links to the second complication : balance sheet policies can mitigate certain facets of the safe asset shortage, but they might exacerbate others. in