funding market. it is important to stress, however, that we aimed to prevent a disorderly deleveraging, not the deleveraging process itself. bank deleveraging leads to a reduction in inside money, that is money created by banks, and with fragmented financial markets, liquidity flows within the euro area were disrupted. by providing an elastic supply of central bank money, we substituted inside for outside money to support the stabilisation of the banking system. indeed, base money – i. e. the total amount of currency in circulation and banks ’ holdings of liquid deposits with the eurosystem – increased by almost 30 % following the two vltros. the ecb ’ s forward guidance should also be supportive : the governing council of the ecb expects interest rates to stay at present or lower levels for an extended period of time, while inflation should rise towards 2 % over our projection horizon. this implies that real interest rates for borrowers will progressively fall as inflation rises. and we stand ready to act if this scenario does not materialise. but, nonetheless, broad money and credit expansion by the euro area banking system has remained anaemic. the annual growth rate of m3 slowed steadily in the aftermath of the vltros and stood at a very low level of 1. 2 % in january 2014. the monetary policy impulse, as reflected by the increase of base money, has hardly been transmitted to the real economy. additionally, it is clear that the ingredients of “ good deleveraging ” cannot be provided by monetary policy alone. good deleveraging involves, on the liability side, equity being built up euro area bank lending survey, ecb january, 2014. bis central bankers ’ speeches through outright issuance or as last resort through public interventions. and on the asset side, it involves writing down and carving out non - performing assets. indeed, without such measures there is a risk that low interest rates and ample liquidity provided by the ecb might delay the restructuring and reallocation that are necessary to escape a debt overhang. for this reason, prudential measures must also play a key part in the deleveraging process. prudential policy in the new banking union framework for the euro area, the principal tool to steer deleveraging towards its good form is the ongoing comprehensive assessment of banks ’ balance sheets. the ecb has recently released more technical details about an important component of this exercise, the asset quality review, so i will not repeat its

good idea. however, the practical implementation of this idea is fraught with complications and, if done unwisely, may actually be very damaging, and turn out to be more costly for taxpayers. the events of recent months seem to confirm my views. i would define private sector involvement ( psi ), for the purpose of this discussion, as intentional efforts and contributions, formal or informal, undertaken in a context of sovereign financial distress. this support ranges from softer forms, such as preventive talks, to harder forms, such as debt rescheduling, restructurings, reprofiling or even debt write - downs. 1 2 in the remainder of my talk, i will look mainly at the harder forms of psi, often called debt restructurings. see enderlein, muller, and trebesch, 2006. soft forms of private sector involvement include those that would not change the terms and conditions of the bonds or loans. such forms may include voluntary roll - over agreements and preventive talks and meetings. by contrast, harder forms of private sector involvements imply changes to the terms and conditions of the bonds or loans. under some forms, the private sector participants may face a net present value loss, in other cases they would not face such a loss. bis central bankers ’ speeches the basic rationale behind involving private creditors when a debtor is in distress is straightforward and uncontroversial : creditors and investors should bear the consequences of their decisions as fully as possible and should not rely on taxpayers ’ money to be bailed out. 3 the underlying reason has long existed : a bailout by taxpayers today may encourage risky lending by private investors in the future. in the corporate sector, it is actually commonplace to apply such principles. under bankruptcy laws or out - of - court settlement guidelines, such as the london rules, the jakarta initiatives or the hong kong guidelines, when a corporate is facing financing difficulties, the responsibility is passed to the debtor and creditors to arrange debt settlements among themselves. indebted companies can reorganise and restructure their operations to return to profitability. in turn, creditors agree to reschedule loans or accept the conversion of debt into equity. while the basic principles of private creditor participation in resolving the debtor ’ s dilemma are uncontroversial, the application of these principles to sovereign debt is much more complex. debt workouts in the corporate and public sectors are quite different. first, assessing the solvency of a