market spreads more precisely, the spread between the cost of unsecured short - term funding from other financial intermediaries – in the euro area, the so - called euribor rate – and the interest see : c. holthausen and h. pill ( 2010 ) : “ the forgotten markets : how understanding money markets helps to understand the financial crisis ”, ecb research bulletin 9, pp. 2 – 5. rate on the equivalent index swap rates, which had been negligible around the middle of the decade, suddenly rose to record levels. these events were especially worrying because they threatened to disrupt the transmission of monetary policy to the real economy. to the extent that firms and households borrow at interest rates indexed to unsecured interbank rates, the emergence of a large and variable spread between policy rates and these market rates implied a potential loss of control of central banks over financing conditions. given heightened concerns about counterparty risk – which intensified dramatically after the failure of lehman – cash - rich banks proved unwilling to lend to banks needing liquidity. 14 as a result, the money market came close to a total freeze. the ensuing decline in banks ’ ability to raise funds led to a tightening of credit conditions facing enterprises and households. there was a clear and present danger that the resulting tightening of financial conditions would lead to augment the risk of a deflationary spiral, to trigger additional credit losses and a vicious downward cycle of financial and real distress. to avert this danger, central banks introduced a variety of non - standard measures to permit their reduction of policy interest rates to be fully transmitted. in the case of the ecb, the governing council acted swiftly to address these risks through our policy of enhanced credit support. 15 since banks play a central role in the intermediation of credit in the euro area, we have largely directed our efforts at banks rather than intervening to influence activity and spreads in specific financial markets. to satisfy the higher liquidity needs of banks, we decided to allocate liquidity on a full allotment basis at fixed rates. we also lengthened the maturity of our operations up to one year, to give banks a more medium - term perspective in their liquidity planning. this measure greatly attenuated the maturity mismatch between assets and liabilities in banks ’ books, which would otherwise have further deterred bank lending. at the same time, we expanded the list of assets that we accept as collateral in our operations. by expanding the list of

difficult process that requires an ongoing monitoring and understanding of financial innovation and continuous attempts to sharpen and deepen our understanding of financial developments. nor should monetary analysis, or the detection of the build - up of financial imbalances, be seen as an end in itself. monetary analysis is only useful insofar as it improves policy decisions and furthers the achievement of the ecb ’ s ultimate objective. the primary objective of the ecb is the maintenance of price stability in the euro area. from the outset, we have emphasised the need to adopt a medium - term orientation in pursuit of this objective, acknowledging the long and variable lags in the transmission of monetary see : a. beyer and l. reichlin ( eds. ) ( 2008 ), the role of money : money and monetary policy in the 21st century, european central bank. see : t. adrian and h. s. shin ( 2008 ), “ liquidity, monetary policy, and financial cycles ” frb new york current issues in economics and finance 14 ( 1 ), pp. 1 – 7. policy, which make “ fine - tuning ” of price developments in the face of the inevitable economic shocks both impossible and potentially counterproductive. 12 adopting such a medium - term orientation allows a degree of flexibility to monetary policymakers. there are many paths of policy interest rates that are consistent with maintaining price stability over the medium term. in choosing among these various paths, policy - makers may seek policy settings that contain the emergence of financial imbalances, so as to impart greater stability to the economy as a whole. analysis of monetary and credit developments may offer insight into the slow accumulation of financial imbalances and thus identify a growing threat to macroeconomic stability in general, and price stability in particular, over the longer term. given such signals, central banks can respond in a commensurate and timely manner. responding to money and credit developments in this way implies “ leaning against ” financial imbalances and asset price misalignments. even if such an approach creates some inflation volatility in the shorter run, it better serves price and macroeconomic stability at longer horizons. while conducting monetary policy in this way helps to provide an environment of price and macroeconomic stability that is conducive to financial stability, alone it will not suffice. responsibility for the maintenance of financial stability should largely fall on the shoulders of regulators and supervisors. along this dimension, the crisis has highlighted the distinction