down. the restructuring of the banking system will contribute to economic recovery and growth the recession and the evolution of credit flows interact the fiscal crisis and the climate of uncertainty have significantly worsened financial conditions during the past two years. doubts as to the greek economy ’ s ability to break out of the vicious circle affected greek banks, with the result that they were shut out from international markets and experienced a continuous decline in deposits : from end - october 2009 to end - february 2012, domestic bank deposits by the private sector decreased by over €70 billion, an equivalent to approximately one - third of greek gdp. the deposit outflows markedly constrained banks ’ ability to provide credit to the economy. bis central bankers ’ speeches the economic recovery hinges upon the setting in motion of a virtuous circle, whereby an improved economic outlook fosters the strengthening of the banking system, so that the latter can, in turn, supply credit to the real economy, with positive feedback effects on expectations, and so on. it is possible to improve the funding potential improving the funding potential for the economy can be achieved in the following ways : first, by restoring confidence, which could initially lead to a return of bank deposits of some €10 – 15 billion of cash now being hoarded and then encourage capital repatriation. this would substantially improve banks ’ liquidity positions. second, by attracting funds from sources other than the banking system. two sources can be mentioned in this regard. the privatisation programme, with expected proceeds of €19 billion by 2015, mainly in the form of capital inflows from abroad, will lead to much greater total inflows if the additional investments required to fully exploit the assets to - beacquired are taken into consideration. credit flows to businesses could be supported by an additional €15 billion, provided that our absorption rate of nsrf funds is improved. to this, one should add the funds available from the european investment bank. the restructuring of the banking system the key factor to improving financial conditions is the strengthening and restructuring of the banking system, currently in progress. 2012 will be a critical year in shaping the future structure of the banking system in greece. banks now face losses originating from the fiscal crisis. first, they are dealing with the implications of having invested in greek government bonds, an instrument considered safe until recently. banks ’ published annual statements show that the related impact is quite substantial. second, banks also face the consequences of the increased difficulty that households and businesses have in servicing their debt

find productive uses for the deposit inflows and perhaps face changes in regulatory capital requirements. in addition, liquidity in some markets might be affected ; for example, the incentive for reserve managers to trade federal funds diminishes as the overnight rate falls, probably thinning brokering in that market. in thinking about the costs associated with a low overnight rate, one should bear in mind the message of milton friedman ’ s classic essay on the optimal quantity of money ( friedman, 1969 ). friedman argued that an overnight interest rate of zero is optimal, because a zero opportunity cost of liquidity eliminates the socially wasteful use of resources to economize on money balances. from this perspective, the costs of low short - term interest rates can be seen largely as adjustment costs, arising from the unwinding of schemes designed to make holding transactions balances less burdensome. these costs are real but are also largely transitory and have limited sectoral impact. moreover, to the extent that the affected institutions have economic functions other than helping clients economize on money balances ( for example, if some money market mutual funds have a comparative advantage in lending to commercial paper issuers ), there is scope for repricing that will allow these services to continue to be offered. thus there seems to be little reason for central banks to avoid bringing the policy rate close to zero if the economic situation warranted. a quite different argument for engaging in alternative monetary policies before lowering the overnight rate all the way to zero is that the public might interpret a zero instrument rate as evidence that the central bank has “ run out of ammunition. ” that is, low rates risk fostering the misimpression that monetary policy is ineffective. as we have stressed, that would indeed be a misimpression, as the central bank has means of providing monetary stimulus other than the conventional measure of lowering the overnight nominal interest rate. however, it is also true that the considerable uncertainty that surrounds the use of these alternative measures does make the calibration of policy actions more difficult. moreover, given the important role for expectations in making many of these policies work, the communications challenges would be considerable. given these risks, policymakers are well advised to act preemptively and aggressively to avoid facing the complications raised by the zero lower bound.