regulation will have an impact, in particular on banks ’ liquidity management and the markets for liquidity along several dimensions. this is actually the aim of the regulation. had the result been “ business as usual ”, this would have probably made some market participants quite happy, but would have been a sign of failure. there is of course an issue of gradualism and calibration, with a view to avoiding the two extremes – an excessively abrupt adjustment and an everlasting phasing - out. but it seems to me that this issue has been dealt with in a reasonable way. the changes in the financial system caused by the regulation will have to be factored in also by the policy authorities. for central banks, the changes may be far - reaching, ranging from the transmission mechanism of monetary policy to interactions with several aspects of the operational frameworks. at the ecb we are actively working on these issues to ensure that our monetary policy continues to be conducted in an effective way, also in the new environment, so as to maintain price stability, our primary goal. thank you for your attention. giavazzi, f., and a. giovannini, ( 2010 ), “ central banks and the financial system ”, nber working paper series no 16228.

monetary policy and the build - up of financial risk the interaction between monetary policy and the amount of risk in the economy is not confined to the details of the collateral framework. it extends also to the interest - rate setting itself. unfortunately, most macromodels are not well suited to analyse the relationship between monetary policy and the build - up of financial imbalances. they generally assume that monetary policy works via the impact of the short - term policy rate on long - term interest rates and the exchange rate, possibly amplified by the so - called credit channel. however, recent research has challenged the traditional wisdom by suggesting that in reality there are other channels at work which are relevant to understanding the interaction between monetary policy and financial imbalances. 10 first, it has been suggested that policy rates would be crucial in their own right. the reason is that financial institutions normally tend to maintain very low spare capacity on their balance sheets – for cost reasons – making wholesale funding the only readily available source of funds to finance at the margin an additional unit of investment. the close association of money market rates to policy rates implies that the central bank has a direct grip on the marginal price of financial institutions ’ leverage. and leverage is one of the key factors that determine the amount of risk and the extent of vulnerability present in the financial system. second, it has been suggested that monetary policy works also via the so - called “ risk - taking ” channel, whereby low levels of policy rates tend to induce excessive risk - taking by financial institutions. 11 these new insights can shed light on the effects that very expansionary monetary conditions can have on financial imbalances, fuelling in particular the build - up of maturity mismatches via excessively low interest rates. and these insights also make clear the hazard to which the central bank is constantly exposed. if a liquidity crisis occurs, the central bank may have to step in and provide abundant liquidity to preserve the functioning of the transmission mechanism and counteract risks to price stability emanating from systemic instability. anticipating this policy response, the private sector may in normal times under - price the value of liquidity, which in itself increases the probability of a liquidity crisis in the future. see adrian, t., and h. shin, ( 2010 ), “ financial intermediaries and monetary economics ”, forthcoming in handbook of monetary economics, edited by b. friedmann and m. woodford ; borio, c., and h. zhu, (