jurgen stark : the global financial crisis and the role of central banking speech by mr jurgen stark, member of the executive board of the european central bank, at a meeting hosted by the institute of regulation & risk, north asia, hong kong, 12 april 2011. * * * it is a pleasure for me to address this distinguished audience. in my remarks today, i would like to share some thoughts with you on how the global financial crisis could shape central banking in the future. crises are often associated with deep - seated changes in both the mandates and functions of central banks – this is a well - established regularity in contemporary economic history. for example, central bank inaction was widely held responsible for worsening the economic downturn during the great depression of the 1930s. the result was that monetary policy was placed under the control of fiscal authorities for nearly two decades afterwards. the great inflation of the 1970s had the opposite effect. the failure of weak monetary regimes to reign in high inflation led to the establishment, in the early 1980s, of monetary policy frameworks solidly anchored by price stability mandates, and safeguarded by independent and autonomous central bankers. will this crisis – which is still ongoing – have any implications for the tasks of central banks in the future? to shed light on this question, i will, first of all, look back on the salient features of the monetary policy paradigm prevailing before the crisis. then i will review how central banks responded in practice to the crisis, focusing on the ecb ’ s policy actions in this regard. and finally, i will discuss whether certain aspects of the pre - crisis monetary policy paradigm need to be reassessed on the basis of the recent experience, and outline the likely challenges for central banks that lie ahead. * * * 1. the monetary policy paradigm before the crisis we do not know yet to what extent the pre - crisis consensus macroeconomic framework has been de - constructed by the crisis. but we do know that the “ hubris ” of the intellectual paradigm on which that framework was erected has completely vanished. some aspects of the framework, in my view, will undoubtedly survive the crisis. one is the great and increasingly shared emphasis on central bank independence. another is the centrality of price stability for monetary policy. these were the twin foundations of the dominant monetary policy paradigm before the crisis, and the crisis has not challenged or discredited either of them. i will return to the issue of price stability towards the end of my remarks. beyond these

the interbank market emerged in the euro area and elsewhere in august 2007, the ecb reacted swiftly by providing de facto unlimited overnight liquidity to limit euro area banks ’ liquidity risk. as the tensions morphed into a large - scale crisis of confidence in october 2008, the ecb responded with a mix of standard and non - standard monetary policy actions to foster financing conditions and enhance its credit support to the euro area economy, all with a view to maintaining price stability. the standard measures essentially entailed a steep reduction of the main refinancing rate to a historical low of 1 % over a seven - month period ( october 2008 – may 2009 ). this was done in reaction to the weak economic environment and the associated change in the inflation outlook. the non - standard measures included granting banks unlimited access to central bank liquidity against an extended range of collateral with the possibility for banks to borrow liquidity at a broader spectrum of maturities, of up to 12 months. the ecb also intervened directly in some market segments that were dysfunctional, namely the covered bonds market. this was deemed important for the long - term financing of banks. in may 2010 the financial crisis took a different direction ; markets started to question the sustainability of public finances in parts of the euro area. in response, the ecb intervened in some debt securities markets, in order to prevent large and important segments of the securitised credit market seizing up and obstructing monetary policy transmission. these interventions have been limited in size, and their impact on liquidity creation has been fully sterilised. overall, the non - standard measures have been adopted with a view to ensuring the transmission of low policy rates to the euro area economy. they have been tailored to the specific financial structure of the euro area economy, whose financing to a large extent relies on banks. these measures are fully in line with the ecb ’ s price stability objective. in this regard, the approach chosen by the ecb and the eurosystem differs from that of other major central banks which embarked on large - scale unconventional measures to replace, rather than complement, standard actions, after those standard actions – changes in the policy interest rate – had reached their lower limit. in this respect, the ecb ’ s non - standard response does not qualify as a form of quantitative easing or credit easing. non - standard monetary policy measures are an extraordinary response to exceptional circumstances. they are, by construction, temporary in nature. looking